As filed with the Securities and Exchange Commission on June 3, 2005

Registration No. 333-            

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

ELECTRO-OPTICAL SCIENCES, INC.

(Exact name of registrant as specified in its charter)

3 West Main Street, Suite 201

Irvington, New York 10533

(914) 591-3783

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

Joseph V. Gulfo, M.D.

President and Chief Executive Officer

Electro-Optical Sciences, Inc.

3 West Main Street, Suite 201

Irvington, New York 10533

(914) 591-3783

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

      Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

      If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) check the following box.     o

      If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

      If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

      If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

      If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.     o

CALCULATION OF REGISTRATION FEE

      The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

SUBJECT TO COMPLETION, DATED JUNE      , 2005

PROSPECTUS

          l          Shares

Electro-Optical Sciences, Inc.

Common Stock

        This is the initial public offering of        l       shares of common stock of Electro-Optical Sciences, Inc.

      We expect the public offering price to be between $       l       and $       l       per share. There presently is no public market for our securities and we cannot ensure you that a market will develop. We have applied to list our common stock on the NASDAQ National Market under the symbol “MELA.”

       Investing in our common stock is highly speculative and involves a high degree of risk. See “Risk Factors” beginning on Page 7.

       Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

      To the extent the underwriters sell more than        l shares of common stock, the underwriters have the option to purchase up to an additional        l       shares from us at the public offering price less the underwriting discount, within 45 days from the date of this prospectus to cover over-allotments. The underwriters will also receive a non-accountable expense allowance in the amount of one percent (1%) of the total public offering price (excluding the over-allotment option). In addition, upon completion of this offering, the underwriters will receive warrants to purchase up to an aggregate of        l       shares of our common stock at an exercise price equal to 125% of the public offering price per share. The warrants will be exercisable commencing on the first anniversary of the date of this prospectus and ending on the fifth anniversary of the date of this prospectus.

      The underwriters expect to deliver the shares on or about        l       , 2005.

The date of this prospectus is        l       , 2005.

TABLE OF CONTENTS

      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of our common stock and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock.

      For investors outside the US: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the US. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

      We obtained statistical data and certain other industry forecasts used throughout this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical and industry data and forecasts and market research used herein are reliable, we have not independently verified such data, and we do not make any representation as to the accuracy of the information. We have not sought the consent of the sources to refer to their reports in this prospectus.

	•	a hand-held imaging device, which employs high precision optics and multi-spectral illumination (multiple colors of light including near infra-red);
	•	our proprietary database of pigmented skin lesions, which we believe to be the largest in the US;
	•	our lesion classifiers, which are sophisticated mathematical algorithms that extract lesion feature information and classify lesions; and
	•	a central server in our offices that is intended to perform quality control functions and provide reports to the physician and in commercial use, will be connected to physicians’ offices via the internet.

	•	Pursue timely FDA approval of MelaFind®: We have entered into a binding Protocol Agreement with the FDA for the conduct of the pivotal trial of MelaFind®. Management estimates that the study will commence in early 2006 at over 20 US clinical study sites, and anticipates PMA approval to commercialize MelaFind® in 2007.
	•	Establish MelaFind® as the leading technology for assisting in the detection of melanoma: We have invested considerable capital and expertise into developing our core technology platform, which is

		protected by six US patents. We will continue to refine and optimize this technology to ensure that MelaFind® is the leading system for assisting in the detection of melanoma.
	•	Obtain third party payor reimbursement to support our recurring revenue pricing model: We intend to offer MelaFind® on a per patient basis, creating a recurring revenue stream. To do so, we will seek to obtain third party reimbursement as well as private pay alternatives. We are working with experts to create an evidence-based medicine evaluation model consistent with those used to support positive coverage decisions by the federal Centers for Medicare & Medicaid Services (CMS) and private payors for similar products. The value drivers in the model include the treatment and diagnostic cost savings associated with early detection (approximately $168,000 per patient) and fewer biopsies. We believe that the use of MelaFind® could result in substantial savings to the US healthcare system.
	•	Commercialize MelaFind® using multiple sales and marketing strategies: Our sales and marketing effort will focus initially on “high volume/key opinion leader” dermatologists with specialties in the diagnosis and treatment of melanoma. To enter the larger US markets of general dermatologists, plastic surgeons, and primary care physicians, and for international markets, we intend to establish partnerships with pharmaceutical and/or diagnostic device companies with an established presence in these markets.

Common stock offered by us		l        shares
Common stock outstanding after the offering		l        shares
Use of proceeds		We estimate that our net proceeds from this offering will be approximately $       l        million at an assumed initial public offering price of $       l        per share, which is the mid-point of our filing range, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We intend to use these net proceeds to fund our research and development activities, including our clinical studies, to build our sales and marketing capabilities, and for general corporate purposes, including working capital needs, facilities expansion and potential acquisitions. See “Use of Proceeds.”
Risk factors		You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.
Proposed NASDAQ National Market symbol		MELA

	•	899,875 shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options under our 2003 Stock Incentive Plan and our 1996 Stock Option Plan, respectively, at a weighted average exercise price of approximately $0.63 per share, which amount is 54,391 shares less than the number of shares issuable under such option plans as of March 31, 2005 due to the effect of a formula-based option granted to our President and Chief Executive Officer — see “Management — Employment Agreement”;
	•	up to 1,000,000 shares of common stock reserved for future grants under our 2005 Stock Incentive Plan;
	•	75,000 shares of common stock issuable upon exercise of outstanding warrants to purchase common stock at an exercise price of $7.00 per share;
	•	73,280 shares of common stock issuable upon exercise of outstanding warrants to purchase our series C convertible preferred stock (assuming conversion of our series C convertible preferred stock) at an exercise price of $4.52 per share; and
	•	l        shares of common stock issuable upon exercise of warrants to be issued to the underwriters upon completion of this offering at an exercise price equal to 125% of the public offering price per share.

	•	that all outstanding shares of our series A convertible preferred stock, series B convertible preferred stock and series C convertible preferred stock are converted into shares of our common stock immediately prior to completion of this offering;
	•	that all outstanding warrants to purchase our common stock with an exercise price of $13.00 per share have been exchanged for our common stock based on an exchange rate of one share of common stock for every two shares of common stock purchasable under such warrants in a cashless exchange. See the full discussion in “Related Party Transactions — Warrants to Purchase Common Stock”;
	•	no exercise of the underwriters’ over-allotment option;
	•	the adoption of our fourth amended and restated certificate of incorporation and third amended and restated bylaws; and
	•	a 1-for-2 reverse stock split of our common stock which was approved by our board of directors on May 13, 2005, effective upon the earlier of the conversion of our preferred stock or September 30, 2005.

															Three Months Ended
			Year Ended December 31,												March 31,
			2002				2003				2004				2004				2005
															(unaudited)
			(In thousands, except share and per share data)
Statement of Operations Data:
Revenue from DIFOTI® sales, net			$	143			$	375			$	364			$	91			$	88
Revenue from grants				547				—				—				—				—
Total revenues				690				375				364				91				88
Cost of goods sold				650				83				166				20				8
Gross profit				40				292				198				71				80
Operating expenses:
	Research and development			404				828				1,892				307				636
	Selling, general and administrative			769				1,339				1,858				533				713
Total operating expenses				1,173				2,167				3,750				840				1,349
Loss from operations				(1,133	)			(1,875	)			(3,552	)			(769	)			(1,269	)
Interest (income)/expense				8				75				67				1				(26	)
Net loss				(1,141	)			(1,950	)			(3,619	)			(770	)			(1,243	)
Preferred stock deemed dividends				214				322				676				111				362
Preferred stock accretion				180				25				323				7				421
Stock distribution on series B preferred shares				—				102				—				—				—
Net loss attributable to common stockholders			$	(1,535	)		$	(2,399	)		$	(4,618	)		$	(888	)		$	(2,026	)
Basic and diluted net loss per share			$	(1.00	)		$	(1.49	)		$	(2.61	)		$	(0.53	)		$	(1.12	)
Basic and diluted weighted average shares outstanding				1,534,760				1,614,897				1,766,608				1,684,760				1,809,758
Pro forma basic and diluted net loss per common share (unaudited)(1)											$	(0.91	)						$	(0.19	)
Pro forma basic and diluted weighted average number of common shares outstanding (unaudited)(1)												3,967,024								6,513,164

(1)

Pro forma basic and diluted net loss per common share reflects the effect of the assumed conversion of the company’s preferred stock, as if this offering had occurred at the date of original issuance into 3,398,105 shares of our common stock for the year ended December 31, 2004 and three months ended March 31, 2005 which will occur upon closing of this public offering. Additionally, it is assumed that 2,610,643 warrants to purchase the company’s common stock will be exchanged for a total of 1,305,321 shares of the company’s common stock based on an exchange ratio of one share of our common stock for every two shares of our common stock purchasable under the warrants and will occur prior to the closing of this offering. The net loss attributable to our common stockholders used in the computation of basic and diluted net loss per share to compute the unaudited pro forma net loss attributable to common stockholders, has been adjusted to reverse the accretion on our preferred stock and also excludes the preferred stock dividends for the respective period.

	•	On an actual basis; and
	•	On an as adjusted basis to give effect to (1) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 3,398,105 shares of common stock upon the completion of this offering; (2) the exchange of 2,610,643 warrants to purchase the company’s common stock for a total of 1,305,321 shares of the company’s common stock based on an exchange ratio of one share of our common stock for every two shares of our common stock purchaseable under the warrants that is assumed to occur prior to the closing of this offering; and (3) the sale of       l       shares of common stock in this offering at an assumed initial public offering price of $       l       per share, after deducting estimated underwriting discounts and commissions and offering expenses paid and payable by us.

		As of December 31,								As of March 31, 2005
		2003				2004
														Pro Forma
		Actual				Actual				Actual				As Adjusted
										(unaudited)
		(In thousands)
Balance sheet data:
Cash, cash equivalents and marketable securities		$	117			$	6,703			$	5,300				l
Working capital			(433	)			6,122				4,919				l
Total assets			432				7,096				5,734				l
Total liabilities			650				691				493				l
Redeemable convertible preferred stock			4,067				8,585				9,006				l
Total stockholders’ (deficiency)/equity			(4,285	)			(2,180	)			(3,765	)			l

RISK FACTORS

      Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would suffer. In that case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business, financial conditions and results of operations.

Risks Relating to Our Business

     We currently do not have, and may never develop, any commercialized products.

      We currently do not have any commercialized products or any significant source of revenue. We have invested substantially all of our time and resources over the last five years in developing MelaFind®. MelaFind® will require additional development, clinical evaluation, regulatory approval, significant marketing efforts and substantial additional investment before it can provide us with any revenue. Our efforts may not lead to commercially successful products for a number of reasons, including:

      We do not expect to be able to commercialize MelaFind® before 2007. If we are unable to develop, obtain regulatory approval for or successfully commercialize MelaFind®, we will be unable to generate revenue.

     We have not received, and may never receive, FDA approval to market MelaFind®.

      We do not have the necessary regulatory approvals to market MelaFind® in the US or in any foreign market. We have not filed, and currently do not have plans to file, for regulatory approval in any foreign market. We plan initially to launch MelaFind®, once approved, in the US. The regulatory approval process for MelaFind® in the US involves, among other things, successfully completing clinical trials and obtaining PMA approval from the FDA. We commenced the PMA application process for MelaFind® by filing a proposed outline for a Modular PMA on September 30, 2002. The PMA process requires us to prove the safety and effectiveness of MelaFind® to the FDA’s satisfaction. This process is expensive and uncertain, and requires detailed and comprehensive scientific and human clinical data. FDA review may take years after a PMA application is filed. The FDA may never grant approval. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:

      No precedent has been established for FDA approval of a device such as MelaFind® to assist in determining the appropriateness of biopsies of suspicious pigmented skin lesions. Before submitting a PMA application (the final module), we must successfully complete a pivotal clinical trial to demonstrate that MelaFind® is safe and effective. Product development, including clinical trials, is a long, expensive and uncertain process, and is subject to delays and failure at any stage. Furthermore, the data obtained from the trial may be inadequate to support approval of a PMA application. While we obtained a Protocol Agreement from the FDA, FDA approval of a Protocol Agreement does not mean that the FDA will consider the data gathered in the trial sufficient to support approval of a PMA application, even if the trial’s intended endpoints are achieved. There may be unexpected findings, particularly those that may only become evident from the larger scale of the pivotal clinical trial, as compared with the smaller scale tests done to date. For example, we initiated a clinical trial and encountered several technical problems which required us to refine the MelaFind® system. The data obtained in the pivotal trial may not be sufficient to support the anticipated indication for use, and may not support a more limited indication for use. The occurrence of unexpected findings in connection with the pivotal trial or any subsequent clinical trial required by the FDA may prevent or delay obtaining PMA approval, and may adversely affect coverage or reimbursement determinations. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or even years while the trials are conducted and the data acquired are submitted in an amendment to the PMA. If we are unable to complete the clinical trials necessary to successfully support the MelaFind® PMA application, our ability to commercialize MelaFind®, and our business, financial condition, and results of operations would be materially adversely affected, thereby threatening our ability to continue operations.

     If MelaFind® is approved by the FDA, it may be approved only for narrow indications.

      Even if approved, MelaFind® may not be approved for the indications that are necessary or desirable for successful commercialization. Our preference is to obtain a broad indication for use in diagnosing almost all pigmented melanomas (other than those on palms, soles of the feet, in or near the eye, and inaccessible areas such as the edge of the nose). The final MelaFind® lesion classifier should be able to identify the maximum number of types of melanoma possible. The indications for use must specify those lesion types for which the classifier has not been trained. Approximately five percent of melanoma lesions may be amelanotic, meaning they are not pigmented. These lesions cannot be differentiated by MelaFind®, which will be restricted to pigmented lesions. Approximately ten percent of pigmented melanoma lesions are of the nodular type. If nodular melanoma lesions are not sufficiently well-represented in the MelaFind® training database, the classifier may not differentiate nodular melanomas from non-melanomas with sufficient sensitivity and specificity. If we restrict the indications for use of MelaFind® to exclude certain melanoma lesion types, in addition to the other restrictions, then the size of the market for MelaFind® and the rate of acceptance of MelaFind® by physicians may be adversely affected.

      If we wish to modify MelaFind® after receiving FDA approval, including changes in indications or other modifications that could affect safety and effectiveness, additional approvals could be required from the FDA. We may be required to submit extensive pre-clinical and clinical data, depending on the nature of the changes. Any request by the FDA for additional data, or any requirement by the FDA that we conduct additional clinical studies, could delay the commercialization of MelaFind® and require us to make substantial additional research, development and other expenditures. We may not obtain the necessary regulatory approvals to market MelaFind® in the US or anywhere else. Any delay in, or failure to receive or maintain, approval for MelaFind® could prevent us from generating revenue or achieving profitability, and our business, financial condition, and results of operations would be materially adversely affected.

      The availability of medical insurance coverage and reimbursement for newly approved medical devices is uncertain. In the US, physicians and other healthcare providers performing biopsies for suspicious skin lesions are generally reimbursed for all or part of the cost of the diagnosis and biopsy by Medicare, Medicaid, or other third-party payors. The commercial success of MelaFind® in both domestic and international markets will significantly depend on whether third-party coverage and reimbursement are available for services involving MelaFind®. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both the scope of coverage and the level of reimbursement of new medical devices, and as a result, they may not cover or provide adequate payment for the use of MelaFind®. In order to obtain satisfactory reimbursement arrangements, we may have to agree to a fee or sales price lower than the fee or sales price we might otherwise charge. Even if Medicare and other third-party payors decide to cover procedures involving our product, we cannot be certain that the reimbursement levels will be adequate. Accordingly, even if MelaFind® or future products we develop are approved for commercial sale, unless government and other third-party payors provide adequate coverage and reimbursement for our products, some physicians may be discouraged from using them, and our sales would suffer.

      Medicare reimburses for medical devices in a variety of ways, depending on where and how the device is used. However, Medicare only provides reimbursement if CMS determines that the device should be covered and that the use of the device is consistent with the coverage criteria. A coverage determination can be made at the local level by the Medicare administrative contractor (formerly called carriers and fiscal intermediaries), a private contractor that processes and pays claims on behalf of CMS for the geographic area where the services were rendered, or at the national level by CMS through a national coverage determination. There are new statutory provisions intended to facilitate coverage determinations for new technologies, but it is unclear how these new provisions will be implemented. Coverage presupposes that the device has been cleared or approved by the FDA and further, that the coverage will be no broader than the approved intended uses of the device as approved or cleared by the FDA, but coverage can be narrower. A coverage determination may be so limited that relatively few patients will qualify for a covered use of the device. Should a very narrow coverage determination be made for MelaFind®, it may undermine the commercial viability of MelaFind®.

      Obtaining a coverage determination, whether local or national, is a time-consuming, expensive and highly uncertain proposition, especially for a new technology, and inconsistent local determinations are possible. On average, according to an industry report, Medicare coverage determinations for medical devices lag 15 months to five years or more behind FDA approval for that device. The Medicare statutory framework is also subject to administrative rulings, interpretations and discretion that affect the amount and timing of reimbursement made under Medicare. Medicaid coverage determinations and reimbursement levels are determined on a state by state basis, because Medicaid, unlike Medicare, is administered by the states under a state plan with the Secretary of the US Department of Health and Human Services (HHS). Medicaid generally reimburses at lower levels than Medicare. Moreover, Medicaid programs and private insurers are frequently influenced by Medicare coverage determinations.

      Clinical studies in the US have been ongoing for over five years, and we have a Protocol Agreement with the FDA, but we have not conducted the pivotal clinical trial required for PMA approval. We initiated a trial under the terms of the Protocol Agreement at the end of 2004. However, technical operational issues with the systems were experienced, requiring further refinement. We currently anticipate commencing the pivotal clinical trial in early 2006. The pivotal clinical trial and supporting clinical studies will require the involvement of larger numbers of clinical sites than we have previously engaged at any single time, and the recruitment of large numbers of patients. If the clinical sites, which enroll patients on a best efforts basis, do not provide

cases at rates anticipated for any reason (such as, for example, lower than forecasted clinical site productivity), we may face delays or may be unable to complete the development of MelaFind®.

     Risk of delay in product development.

      We could encounter delays in our pivotal trial or in obtaining PMA approval because of a number of factors. We will require the receipt of all information specified in our Protocol Agreement on the required number of melanomas before the pivotal clinical trial can be concluded. The MelaFind® classifier will then be utilized to evaluate the lesions acquired during the trial, and the results will be analyzed to determine if we have achieved the endpoints specified in the Protocol Agreement.

      The final training of the classifier, required to be completed before the classifier is utilized as described above, is expected to take approximately two months. Accordingly, the classifier must be ready for final training two months before the end of the pivotal trial. For the classifier to be ready for final training, approximately 300 melanoma lesions are targeted to have been received. Therefore, in addition to acquiring the melanoma lesions required to complete the pivotal trial (approximately 100), we must have completed the acquisition of approximately 300 training melanoma lesions on schedule. Currently, approximately 225 melanoma lesions are in the training database. The current classifier has been trained on 113 of these melanoma lesions.

      Our schedule for the acquisition of these lesions is based upon the projected numbers of imaging devices to be located at participating sites, the projected productivity of those sites in terms of melanomas and other lesions biopsied per month, and the projected efficiency of the study pathologists in classifying the lesion slides presented for dermatohistopathological analysis and reporting their results. If we are unable to produce and maintain a sufficient number of imaging devices at participating sites, if the clinicians do not maintain sufficient productivity, or if the pathologists do not produce reports with sufficient efficiency, then our ability to maintain our schedule will be adversely affected, the start or conclusion of the pivotal trial may be delayed, and the submission of the completed PMA will be delayed.

      To date, the lesion images in the training database have been acquired using first-generation hand-held devices, which also extract data from the lesions that are used by the classifiers. Pre-commercialization hand-held devices are being developed for use in the pivotal trial. If the lesion data obtained with pre-commercialization devices are not consistent with data from the first generation hand-held devices, the classifier will need to be trained solely on lesions imaged using only one or the other generation of hand-held devices. Were this need to arise, significant delay and expense could be incurred, which could jeopardize our ability to complete the development of MelaFind®.

      We began operations in December 1989. At that time we provided research services, mostly to US government agencies, on classified projects. We have financed our operations since 1999 primarily through private placements of our equity securities, and have devoted substantially all of our resources to research and development relating to MelaFind®. Our net loss for the three months ended March 31, 2005 was $1.2 million, and as of March 31, 2005, we had an accumulated deficit of approximately $15.1 million. We expect our research and development expenses to increase in connection with our clinical trials and other development activities related to MelaFind®. If we receive PMA approval for MelaFind® from the FDA, we expect to incur significant sales and marketing expenses, and manufacturing expenses. Additionally, if we complete our initial public offering, we expect that our general and administrative expenses will increase due to the additional operational and regulatory burdens applicable to public companies. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity.

      We do not know of any product possessing the diagnostic assistance capabilities of MelaFind®. We believe that electro-optical products designed to enhance the visualization and analysis of potential melanomas have been approved or are under development by: Welch Allyn, Inc.; Heine Optotechnik; 3Gen, LLC; Derma Medical Systems, Inc.; Medical High Technologies S.p.A.; ZN Vision Technologies AG; Polartechnics, Ltd.; Astron Clinica, Ltd.; LINOS Photonics, Inc.; and Biomips Engineering. The broader market for precision optical imaging devices used for medical diagnosis is intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. If our products are approved for marketing, we will potentially be subject to competition from major optical imaging companies, such as: General Electric Co.; Siemens AG; Bayer AG; Eastman Kodak Company; Welch Allyn, Inc.; Olympus Corporation; Carl Zeiss AG Deutschland; and others, each of which manufactures and markets precision optical imaging products for the medical market, and could decide to develop or acquire a product to compete with MelaFind®. These companies enjoy numerous competitive advantages, including:

      As a result, we may not be able to compete effectively against these companies or their products.

      The precision optical imaging field is subject to rapid technological change and product innovation. MelaFind® is based on our proprietary technology, but a number of companies and medical researchers are pursuing new technologies. Companies in the medical device industry with significantly greater financial, technical, research, marketing, sales and distribution and other resources have expertise and interest in the exploitation of computer-aided diagnosis, medical imaging, and other technologies MelaFind® utilizes. Some of these companies are working on potentially competing products or therapies, including confocal microscopy, various forms of spectroscopy, other imaging modalities, and molecular and genetic screening tests. In addition, the National Institutes of Health and other supporters of cancer research are presumptively seeking ways to improve the diagnosis or treatment of melanoma by sponsoring corporate and academic research. There can be no assurance that one or more of these companies will not succeed in developing or marketing technologies and products or services that demonstrate better safety or effectiveness, superior clinical results, greater ease of use or lower cost than MelaFind®, or that such competitors will not succeed in obtaining regulatory approval for introducing or commercializing any such products or services prior to us. FDA approval of a commercially viable alternative to MelaFind® produced by a competitor could significantly reduce market acceptance of MelaFind®. Any of the above competitive developments could have a material adverse effect on our business, financial condition, and results of operations. There is no assurance that products, services, or technologies introduced prior to or subsequent to the commercialization of MelaFind® will not render MelaFind® less marketable or obsolete.

      We rely on clinical investigators and clinical sites, some of which are private practices, and some of which are research university or government-affiliated, to enroll patients in our clinical trials. We rely on: pathologists and pathology laboratories; a contract research organization to assist in monitoring, collection of data, and ensuring FDA Good Clinical Practices (GCP) are observed at our sites; a consultant biostatistician; and other third parties to manage the trial and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites and other third parties may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, or if the clinical sites fail to comply adequately with the clinical protocols, we will be unable to complete these trials, which could prevent us from obtaining regulatory approvals for MelaFind®. Our agreements with clinical investigators and clinical sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain are compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, MelaFind®.

      In addition to the foregoing, our clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application, for numerous other reasons, including, but not limited to, the following:

      Even if Medicare covers a device for certain uses, that does not mean that the level of reimbursement will be sufficient for commercial success. We expect to experience pricing pressures in connection with the commercialization of MelaFind® and our future products due to efforts by private and government-funded payors to reduce or limit the growth of healthcare costs, the increasing influence of health maintenance organizations, and additional legislative proposals to reduce or limit increase in public funding for healthcare services. Private payors, including managed care payors, increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. Efforts to impose greater discounts and more stringent cost controls upon healthcare providers by private and public payors are expected to continue. Payors frequently review their coverage policies for existing and new diagnostic tools and can, sometimes without advance notice, deny or change their coverage policies. Significant limits on the scope of services covered or on reimbursement rates and fees on those services that are covered could have a

material adverse effect on our ability to commercialize MelaFind® and therefore, on our liquidity and our business, financial condition, and results of operations.

      In some foreign markets, which we may seek to enter in the future, pricing and profitability of medical devices are subject to government control. In the US, we expect that there will continue to be federal and state proposals for similar controls. Also, the trends toward managed healthcare in the US and proposed legislation intended to control the cost of publicly funded healthcare programs could significantly influence the purchase of healthcare services and products, and may force us to reduce prices for MelaFind® or result in the exclusion of MelaFind® from reimbursement programs.

      To date, only those patients who were treated by physicians involved in our clinical trials have been evaluated using MelaFind® and even if we obtain regulatory approval patients with suspicious lesions and physicians evaluating suspicious lesions may not endorse MelaFind®. Physicians tend to be slow to change their diagnostic and medical treatment practices because of perceived liability risks arising from the use of new products and the uncertainty of third party reimbursement. Physicians may not utilize MelaFind® until there is long-term clinical evidence to convince them to alter their existing methods of diagnosing or evaluating suspicious lesions and there are recommendations from prominent physicians that MelaFind® is effective. We cannot predict the speed at which physicians may adopt the use of MelaFind®. If MelaFind® receives the appropriate regulatory approvals but does not achieve an adequate level of acceptance by patients, physicians and healthcare payors, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of MelaFind® will depend on a number of factors, including:

      The identification and screening of melanomas is now dominated by visual clinical evaluation, with a minority of dermatologists using dermoscopy. Even if MelaFind® proves to be as effective as visual inspection by an expert dermatologist, and if all approvals are obtained, the success of MelaFind® will depend upon the acceptance by dermatologists and other physicians who perform skin examinations and treat skin disorders, including industry opinion leaders, that the diagnostic information provided by MelaFind® is medically useful and reliable. We will be subject to intense scrutiny before physicians will be comfortable incorporating MelaFind® in their diagnostic approaches. We believe that recommendations by respected physicians will be essential for the development and successful marketing of MelaFind®, and there can be no assurance that any such recommendations will be obtained. To date, the medical community outside the limited circle of certain dermatologists specializing in melanoma has had little exposure to us and MelaFind®. Because the medical community is often skeptical of new companies and new technologies, we may be unable to gain access to potential customers in order to demonstrate the operation and effectiveness of MelaFind®. Even if we gain access to potential customers, no assurance can be given that members of the dermatological, or later the general practice, medical community will perceive a need for or accept MelaFind®. In particular, given the potentially fatal consequences of failing to detect melanoma at the early, curable stages, practitioners may remain reluctant to rely upon MelaFind® even after we receive approval from the FDA for marketing the product.

      Any of the foregoing factors, or other currently unforeseen factors, could limit or detract from market acceptance of MelaFind®. Insufficient market acceptance of MelaFind® would have a material adverse effect on our business, financial condition and results of operations.

      We currently believe that our available cash, cash equivalents and marketable securities, together with our net proceeds from this offering, will be sufficient to fund our anticipated levels of operations through mid 2008. However, our operations have consumed substantial amounts of cash for each of the last six years. We expect to continue to spend substantial amounts on research and development, including conducting a clinical trial for MelaFind®. Even before we receive approval to market MelaFind®, we expect to spend significant additional amounts to ready the product for commercial distribution following FDA approval, including development of a direct sales force and expansion of manufacturing capacity. We expect that our cash used by operations will increase significantly in each of the next several years, and should we encounter any material delays or impediments, we may need additional funds to complete the development and commercialization of MelaFind®. Any additional financing may be dilutive to stockholders, or may require us to grant a lender a security interest in our assets. The amount of funding we will need will depend on many factors, including:

      Additional financing may not be available to us when we need it, or it may not be available on favorable terms. If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail or cease one or more of our development and marketing programs. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise pursue on our own. We also may have to reduce marketing, customer support and other resources devoted to our products. If we raise additional funds by issuing equity securities, our then-existing stockholders will experience ownership dilution, could experience declines in our share price and the terms of any new equity securities may have preferences over our common stock.

      We do not have a sales organization, and have no experience as a company in the marketing and distribution of devices such as MelaFind®. To achieve commercial success for MelaFind®, we must develop a sales and marketing force and enter into arrangements with others to market and sell our products. Following product approval, we currently plan to establish a small direct sales force to market MelaFind® in the US,

focused on introducing it at high volume dermatologists’ offices and training their staff in its use, but we have not made any final determinations regarding the use of a particular marketing channel. Developing such a sales force is expensive and time consuming, and could delay or limit the success of any product launch. We may not be able to develop this capacity on a timely basis or at all. Qualified direct sales personnel with experience in the medical device market are in high demand, and there is no assurance that we will be able to hire or retain an effective direct sales team. Similarly, qualified, independent medical device representatives both within and outside the US are in high demand, and we may not be able to build an effective network for the distribution of our product through such representatives. We have no assurance that we will be able to enter into contracts with representatives on terms acceptable or reasonable to us. Similarly, there is no assurance that we will be able to build an alternate distribution framework, should we attempt to do so.

      We will need to contract with third parties in order to sell and install our products in larger markets, including non-specialist dermatologists and primary care physicians. To the extent that we enter into arrangements with third parties to perform marketing and distribution services in the US, our product revenue could be lower and our costs higher than if we directly marketed MelaFind®. Furthermore, to the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we will not be able to generate product revenue, and may not become profitable.

      We have not yet completed the development and testing of MelaFind®, and as a result have no experience in manufacturing MelaFind® for commercial distribution. We currently have limited resources, facilities and experience to commercially manufacture MelaFind®. In order to produce MelaFind® in the quantities we anticipate to meet market demand, we will need to increase our manufacturing capacity by a significant factor over the current level, or procure manufacturing services from others. There are technical challenges to increasing manufacturing capacity, including equipment design and automation, material procurement, problems with production yields, and quality control and assurance. Developing commercial-scale manufacturing facilities that meet FDA requirements would require the investment of substantial additional funds and the hiring and retaining of additional management and technical personnel who have the necessary manufacturing experience.

      We currently plan to outsource certain production aspects to contract manufacturers. Any difficulties in the ability of third-party manufacturers to supply devices of the quality, at the times, and in the quantities we need, could have a material adverse effect on our business, financial condition, and results of operations. Similarly, if we enter into contracts for third party manufacture of our devices, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving product yields, controlling and anticipating product costs, quality control and assurance, component supply, and shortages of qualified personnel. We cannot assure you that the third-party contract manufacturers with whom we are developing relationships will have or sustain the ability to produce the quantities of MelaFind® needed for development or commercial sales, or will be willing to do so at prices that allow MelaFind® to compete successfully in the market.

      Assuming that MelaFind® receives regulatory approval, if we are unable to manufacture or obtain a sufficient supply of product, maintain control over expenses, or otherwise adapt to anticipated growth, or if we underestimate growth, we may not have the capability to satisfy market demand, and our business will suffer. Additionally, if MelaFind® receives regulatory approval and we then need to make manufacturing changes, we may need to obtain additional approval for these changes.

      MelaFind® is complex and may contain undetected design defects and errors when first introduced, or errors that may be introduced when enhancements are released. Such defects and errors may occur despite

our testing, and may not be discovered until after our devices have been shipped to and used by our customers. The existence of these defects and errors could result in costly repairs, returns of devices, diversion of development resources and damage to our reputation in the marketplace. Any of these conditions could have a material adverse impact on our business, financial condition and results of operations. In addition, if we contract with third-party manufacturers for the production of our products, these manufacturers may inadvertently produce devices that vary from devices we have produced in unpredictable ways that cause adverse consequences.

      Our manufacturing efforts currently rely on FillFactory, a subsidiary of Cypress Semiconductor Corp., to manufacture and supply the complementary metal oxide semiconductor sensor in MelaFind®, on Pracownia Optyki Instrumentalnej (Optyka) for lens elements and on Fairchild Semiconductor Corp., Panasonic Corp., and others for light-emitting diodes, or LEDs, printed circuit boards, and other elements or components of our devices. We have written agreements with several of these vendors, under which the vendor is obligated to perform services or produce components for us. There can be no assurance that these third parties will meet their obligations under the agreements. Each of these suppliers is a sole-source supplier. Our contract manufacturers also rely on sole-source suppliers to manufacture some of the components used in our products. Our manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also subjects us to other risks that could harm our business, including:

      Any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.

      We have entered into a development agreement with ASKION GmbH (ASKION) to complete developmental engineering and testing of our hand-held imaging device, and have entered into a non-binding Letter of Intent with ASKION to assemble the components and produce initial quantities of our hand-held imaging devices for clinical trials. We intend to enter into a contract for commercial production of the hand-held imaging devices once specifications for MelaFind® have been finalized, but we may not be able to enter such an agreement on mutually acceptable terms. Failure to enter into such an agreement with ASKION would require us to expand our own manufacturing facilities or obtain such services elsewhere. Our planned reliance upon an outside provider for assembly and production services subjects us to the risk of adverse consequences from delays and defects caused by the failure of such outside supplier to meet its contractual

obligations. The failure by us or our supplier to produce a sufficient number of hand-held imaging devices that can operate according to our specifications could delay the pivotal clinical trial and/or the commercial sale of MelaFind®, and would adversely affect both our ability to successfully commercialize MelaFind® and our business, financial condition and results of operations.

      We are in the process, but have not yet successfully completed, all the steps necessary to verify and validate the design of the MelaFind® system that are required to be performed prior to commercialization. If we are delayed or unable to complete verification and validation successfully, we will not be able to sell MelaFind®, and we will not be able to meet our plans for the commercialization of MelaFind® in 2007.

      Assuming that regulatory approval of MelaFind® is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or effectiveness of the device. Later discovery of previously unknown problems with MelaFind®, including manufacturing problems, or failure to comply with regulatory requirements such as the Quality System Regulation (QSR), may result in restrictions on MelaFind® or its manufacturing processes, withdrawal of MelaFind® from the market, patient or physician notification, voluntary or mandatory recalls, fines, withdrawal of regulatory approvals, refusal to approve pending applications or supplements to approved applications, refusal to permit the import or export of our products, product seizures, injunctions or the imposition of civil or criminal penalties. Should any of these enforcement actions occur, our business, financial condition and results of operations could be materially and adversely affected.

      Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continuous review and periodic inspections by the FDA and other regulatory bodies. In particular, we and our suppliers are required to comply with the QSR and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage, promotion, distribution, and shipping of MelaFind®, and with record keeping practices. We also will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports and registration and listing requirements. To the extent that we contract with third parties to manufacture some of our products, our manufacturers will be required to adhere to current Good Manufacturing Practices (cGMP) requirements enforced by the FDA as part of QSR, or similar regulations required by regulatory agencies in other countries. The manufacturing facilities of our contract manufacturers must be inspected or must have been inspected, and must be in full compliance with cGMP requirements before approval for marketing. The FDA enforces the QSR and other regulatory requirements through unannounced inspections. We have not yet been inspected by the FDA for MelaFind®, and will have to complete such an inspection successfully before we ship any commercial MelaFind® devices. However, we were previously inspected in connection with DIFOTI®, which we have discontinued for business reasons, and were cited for failures to comply fully with QSR mandated procedures. We have discussed the findings in a subsequent meeting with the FDA and are in the process of addressing the deficiencies. The FDA inspectors observed deficiencies that were documented on FDA Form 483 that was issued to us following the inspection. We have had a follow-up meeting with the FDA, and are working with the FDA and consultants to address the inspectional findings, particularly as they relate to current MelaFind® design development and ultimate MelaFind® commercial manufacturing. If we are not successful in convincing the FDA that we are capable of addressing its concerns, or if our efforts to address the deficiencies should prove unsuccessful, we might be subject to additional FDA action of a type described below, which could negatively affect our ability to commercialize MelaFind®.

      There can be no assurance that the future interpretations of legal requirements made by the FDA or other regulatory bodies with possible retroactive effect, or the adoption of new requirements or policies, will not adversely affect us. We may be slow to adapt, or may not be able to adapt to these changes or new requirements. Failure by us or one of our suppliers to comply with statutes and regulations administered by the FDA and other regulatory bodies, or failure to take adequate response to any observations, could result in, among other things, any of the following actions:

      If any of these actions were to occur, it would harm our reputation and cause our product sales and profitability to suffer.

      From time to time, legislation is introduced in the US Congress that could significantly change the statutory provisions governing the approval, manufacture and marketing of a medical device. Additionally, healthcare is heavily regulated by the federal government, and by state and local governments. The federal laws and regulations affecting healthcare change constantly, thereby increasing the uncertainty and risk associated with any healthcare related venture, including our business and MelaFind®. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.

      The federal government regulates healthcare through various agencies, including but not limited to the following: (i) the FDA, which administers the Food, Drug, and Cosmetic Act (FD&C Act), as well as other relevant laws; (ii) CMS, which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General (OIG) which enforces various laws aimed at curtailing fraudulent or abusive practices, including by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the OIG to exclude healthcare providers and others from participating in federal healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy aspects of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). All of the aforementioned are agencies within HHS. Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare program, the Public Health Service within HHS under the Public Health Service Act, the Department of Justice through

the Federal False Claims Act and various criminal statutes, and state governments under Medicaid and other state sponsored or funded programs and their internal laws regulating all healthcare activities.

      In addition to regulation by the FDA as a medical device manufacturer, we are subject to general healthcare industry regulations. The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:

      These laws and regulations are extremely complex and, in some cases, still evolving. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. If our operations are found to be in violation of any of the federal, state or local laws and regulations that govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. The risk of being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s time and attention from the operation of our business.

      There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties. These federal laws include: the anti-kickback statute which prohibits certain business practices and relationships, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark Law; the anti-inducement law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs and; the Civil Monetary Penalties Law, which authorizes HHS to impose civil penalties administratively for fraudulent or abusive acts.

      Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. A violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. An investigation into the use of MelaFind® by physicians may dissuade physicians from either purchasing or using MelaFind®, and could have a material adverse effect on our ability to commercialize MelaFind®.

      HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities” (insurers, clearinghouses, and most healthcare providers) and indirectly regulates “business associates” with respect to the privacy of patients’ medical information. All entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is uncertain whether we would be deemed to be a covered entity under HIPAA, and it is unlikely that based on our current business model, we would be a business associate. Nevertheless, we will likely be contractually required to physically safeguard the integrity and security of the patient information that we or our physician customers receive, store, create or transmit. If we fail to adhere to our contractual commitments, then our physician customers may be subject to civil monetary penalties, and this could adversely affect our ability to market MelaFind®. We also may be liable under state laws governing the privacy of health information.

      Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties. Our potential competitors may assert that some aspect of MelaFind® infringes their patents. Because patent applications may take years to issue, there also may be applications now pending of which we are unaware that may later result in issued patents that MelaFind® infringes. There also may be existing patents of which we are unaware that one or more components of our MelaFind® system may inadvertently infringe.

      Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our product that is found to infringe unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign MelaFind® to avoid infringement. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling, offering to sell or importing MelaFind®, and/or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.

      We also may rely on our patents, patent applications and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, or whether a patent application should be granted, is a complex matter of science and law, and therefore we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications and other intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we might otherwise have had.

      Our long-term success is dependent, in large part, on the design, development and commercialization of MelaFind® and other new products and services in the medical device industry. The product development process is time-consuming, unpredictable and costly. There can be no assurance that we will be able to develop or acquire new products, successfully complete clinical trials, obtain the necessary regulatory clearances or approvals required from the FDA on a timely basis, or at all, manufacture our potential products in compliance with regulatory requirements or in commercial volumes, or that MelaFind® or other potential products will achieve market acceptance. In addition, changes in regulatory policy for product approval during the period of product development, and regulatory agency review of each submitted new application, may cause delays or rejections. It may be necessary for us to enter into licensing arrangements, in order to market effectively any new products or new indications for existing products. There can be no assurance that we will be successful in entering into such licensing arrangements on terms favorable to us or at all. Failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on our business, financial condition and results of operations.

      Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those which may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if MelaFind® causes, or merely appears to have caused, an injury or if a patient alleges that MelaFind® failed to provide appropriate diagnostic information on a lesion where melanoma was subsequently found to be present. Claims may be made by patients, healthcare providers or others involved with MelaFind®. MelaFind® will require PMA approval prior to commercialization in the US. The clinical studies of MelaFind® are considered by the FDA as Non-Significant Risk (NSR). Consequently, the trials are conducted under the auspices of an abbreviated Investigational Device Exemption (IDE). We therefore do not maintain domestic clinical trial liability insurance. We have obtained clinical trial liability insurance in certain European countries where required by statute or clinical site policy. Although we have general liability insurance that we believe is appropriate, and anticipate obtaining adequate product liability insurance before commercialization of MelaFind®, this insurance is and will be subject to deductibles and coverage limitations. Our anticipated product liability insurance may not be available to us in amounts and on acceptable terms, if at all, and if available, the coverages may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage, or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

      We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to operate MelaFind®. If these medical personnel are not properly trained or are negligent, we may be subjected to liability. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers, or result in reduced acceptance of MelaFind® in the market.

      Insurance and surety companies have reassessed many aspects of their business and, as a result, may take actions that could negatively affect our business. These actions could include increasing insurance premiums, requiring higher self-insured retentions and deductibles, reducing limits, restricting coverages, imposing exclusions, and refusing to underwrite certain risks and classes of business. Any of these actions may adversely affect our ability to obtain appropriate insurance coverage at reasonable costs, which could have a material adverse effect on our business, financial condition and results of operations.

      The success of MelaFind® is dependent upon our ability to protect our data center against damage from fire, power loss, telecommunications failure, natural disaster, sabotage or a similar catastrophic event. Substantially all of our computer equipment and data operations are located in a single facility. Our prospective failure to maintain off-site copies of information contained in our MelaFind® database, or our inability to use alternative sites in the event we experience a natural disaster, hardware or software malfunction or other interruption of our data center, or any interruption in the ability of physicians to obtain access to our MelaFind® server and its database could adversely impact our business, financial condition and results of operations.

      Our MelaFind® database does not contain any information that allows us to identify specific patients. However, we must identify certain data as belonging to or as derived from specific patients for billing purposes. To the extent that our activities involve the storage and transmission of confidential information, security breaches could damage our reputation and expose us to a risk of loss, or to litigation and possible liability. Our business may be materially adversely affected if our security measures do not prevent security breaches. In addition, such information may be subject to HIPAA privacy and security regulations, the potential violation of which may trigger concerns by healthcare providers, which may adversely impact our business, financial condition and results of operations.

      The connection between the MelaFind® hand-held imaging device and the central server in our offices will be dependent on the internet. Our success will depend in large part on the continued availability of electronic means for storing and transmitting encoded compressed diagnostic information, and storing and transmitting the results of the comparison of such information with our electronically-maintained database through the internet. If the domestic and international telecommunications infrastructure required for these transmissions fails, our business could be materially adversely affected.

      We plan to use the internet as a medium to provide diagnostic assistance services to physicians. We also plan to use the internet to inform the public about the availability of our products and to market to and communicate with physicians who are potential or actual customers. Our success will therefore depend in part on the continued growth and use of the internet. If our ability to use the internet fails, it may materially adversely affect our business.

      Versions of MelaFind® may rely on radio transmissions from the hand-held imaging device to a base station that is connected to the internet. Applicable requirements will restrict us to a particular band of frequencies allocated to low power radio service for transmitting data in support of specific diagnostic or therapeutic functions. Failure to comply with all applicable restrictions on the use of such frequencies, or unforeseeable difficulties with the use of such frequencies, could impede our ability to commercialize MelaFind®.

      All of our operations are conducted at two adjacent buildings in Irvington, New York. We take precautions to safeguard our facility, including insurance, health and safety protocols, contracted off-site engineering services, provision for off-site manufacturing, and storage of computer data. However, a natural disaster, such as a fire, flood or earthquake, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance

we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.

      Our manufacturing, research and development and clinical processes do not generally involve the handling of potentially harmful biological materials or hazardous materials, but they may occasionally do so. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our business, financial condition and results of operations. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We may be subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

      Following commercialization of MelaFind® in the US, we may market MelaFind® internationally. Outside the US, we can market a product only if we receive a marketing authorization and, in some cases, pricing approval, from the appropriate regulatory authorities. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval, in addition to other risks. Foreign regulatory bodies have established varying regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. We may not obtain foreign regulatory approvals on a timely basis, if at all. Foreign regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the US and abroad. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We have not taken any significant actions to obtain foreign regulatory approvals. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize MelaFind® in any market on a timely basis, or at all. Our inability or failure to comply with varying foreign regulation, or the imposition of new regulations, could restrict our sale of products internationally.

      We are highly dependent on our senior management, especially Joseph V. Gulfo, M.D., our President and Chief Executive Officer, and Dina Gutkowicz-Krusin, Ph.D., our Director of Clinical Studies. Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the future, including scientists, clinicians, engineers and other highly skilled personnel. Competition for senior management personnel, as well as scientists, clinicians, engineers, and experienced sales and marketing individuals, is intense, and we may not be able to retain our personnel. The loss of the services of members of our senior management, scientists, clinicians or engineers could prevent the implementation and completion of our objectives, including the development and introduction of MelaFind®. The loss of a member of our senior management or our professional staff would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement. Each of our officers may terminate their employment at any time without notice and without cause or good reason.

      We expect to expand our operations and grow our research and development, product development and administrative operations. This expansion is expected to place a significant strain on our management, and will require hiring a significant number of qualified personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

      Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the US. Generally accepted accounting principles in the US are subject to interpretation by the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants, the Securities and Exchange Commission (SEC), and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

      For example, we currently are not required to record stock-based compensation charges if the employee’s stock option exercise price is equal to or exceeds the fair value of our common stock at the date of grant. However, several companies have recently elected to change their accounting policies, and have begun to record the fair value of stock options as an expense. New FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FASB Statement No. 123R), requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. Under FASB Statement No. 123R, SEC registrants would have been required to implement this standard for interim or annual periods beginning after June 15, 2005, or after December 15, 2005 for small business issuers. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for FASB Statement No. 123R. The SEC’s new rule permits companies to implement FASB Statement No. 123R at the beginning of their next fiscal year, instead of the next reporting period that begins after June 15, 2005, or December 15, 2005 for small business issuers. Awards to most non-employee directors will be accounted for as employee awards. All public companies must use either the modified prospective or the modified retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with FASB Statement No. 123R. Under the modified retrospective method, the previously-reported amounts are restated to either the beginning of the year of adoption or for all periods presented. If we elect to adopt the retroactive provisions and to restate all prior periods presented our operating expenses and reported losses will increase. Although we believe that our accounting practices are consistent with current accounting pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements.

      We have granted to certain employees stock options that vest with the attainment of various performance milestones. Assuming that FASB Statement No. 123R is implemented, then upon the attainment of these milestones we will be required to recognize a stock based compensation expense in an amount based on the then current fair market value of our common stock underlying the options which vest when the milestone is attained. Assuming that all shares offered are sold in this public offering at a price of $       l       per share, the mid-point of our filing range, that upon the attainment of each of the relevant milestones such offering price remains the fair market value per share of our common stock, and that the number of shares of our common stock outstanding after this offering remains       l       then we will record a compensation expense: (1) upon completion of this offering of $       l       with respect to 125,000 shares underlying options with an assumed fair value of $4.00 per share; (2) upon filing our MelaFind® PMA with the FDA of $       l       with respect to 50,000 shares underlying options with an assumed fair value of $4.00 per share; and (3) upon our

receipt of PMA approval for MelaFind® of $       l       with respect to 25,000 shares underlying options with an assumed fair value of $4.00 per share and of $       l       with respect to        l       shares underlying options with an fair value of $0.46 per share.

      We will face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002 (SOX), as well as new rules subsequently implemented by the SEC, the Public Company Accounting Oversight Board and the NASDAQ National Market, require changes in the corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs, to divert management attention from operations and strategic opportunities, and to make legal, accounting and administrative activities more time-consuming and costly. We also expect to incur substantially higher costs to maintain directors’ and officers’ insurance. We are in the process of instituting changes to our internal procedures to satisfy the requirements of the SOX. We are evaluating our internal controls systems in order to allow us to report on, and our independent registered public accounting firm to attest to, our internal controls, as required by Section 404 of the SOX. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 of the SOX in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations, since there is no precedent available by which to measure compliance adequacy. As a small company with limited capital and human resources, we will need to divert management’s time and attention away from our business in order to ensure compliance with these regulatory requirements. As a public company, we will require greater financial resources than we have had as a private company. Implementing these changes may require new information technologies systems, the auditing of our internal controls, and compliance training for our directors, officers and personnel. Such efforts would require a potentially significant expense. If we fail to maintain the adequacy of our internal controls as such standards are modified, supplemented or amended from time to time, we may not be able to provide accurate financial statements and comply with the SOX. Any failure to maintain the adequacy of our internal controls and provide accurate financial statements could cause the trading price of our common stock to decrease substantially.

Risks Relating to this Offering

      Prior to this offering, there has been no public market for our common stock. Although we are seeking approval for listing of our common stock on the NASDAQ National Market, an active trading market for our shares may never develop or be sustained following this offering. Further, we cannot be certain that the market price of our common stock will not decline below the initial public offering price or below the amount required by Nasdaq to maintain a listing on its National Market. Should we fail to meet the minimum standards established by Nasdaq for its National Market, we could be de-listed, meaning shareholders might be subject to limited liquidity. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our common stock after the offering and investors may therefore be unable to sell their common stock at or above the initial public offering price.

      Our stock price is likely to be volatile. The stock market in general and the market for medical technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The following factors, in addition to other risk

factors described in this section and general market and economic conditions, may have a significant impact on the market price of our common stock:

      A decline in the market price of our common stock could cause you to lose some or all of your investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.

      We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in “Use of Proceeds.” Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds, with only limited information concerning management’s specific intentions. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

      Upon closing of this offering, based upon beneficial ownership as of May 15, 2005, our directors, executive officers, holders of more than 5% of our common stock, and their affiliates will, in the aggregate,

beneficially own approximately l% of our outstanding common stock. As a result, these stockholders, subject to any fiduciary duties owed to our other stockholders under Delaware law, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant control over our management and policies. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company, which in turn could reduce the price of our common stock. In addition, these stockholders, some of whom have representatives sitting on our board of directors, could use their voting influence to maintain our existing management and directors in office, delay or prevent changes of control of our company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

     If there are substantial sales of our common stock, our stock price could decline.

      If our existing stockholders sell a large number of shares of our common stock or the public market perceives that these sales may occur, the market price of our common stock could decline. Based on shares outstanding on May 15, 2005, upon the closing of this offering, assuming no outstanding options are exercised prior to the closing of this offering, we will have approximately l shares of common stock outstanding. All of the shares offered under this prospectus will be freely tradable without restriction or further registration under the federal securities laws, unless purchased by our affiliates. Taking into consideration the effect of lock-up agreements that will be entered into by our stockholders, the remaining l shares outstanding upon the closing of this initial public offering will be available for sale pursuant to Rules 144 and 701, and the volume, manner of sale and other limitations under these rules, as follows:

      Existing stockholders holding an aggregate of l shares of common stock and warrant holders holding warrants to purchase l shares of our common stock, based on shares outstanding as of May 15, 2005 have rights with respect to the registration of these shares of common stock with the SEC. See “Description of Capital Stock — Registration Rights.” If we register these shares of common stock, they can immediately sell those shares in the public market.

      Within nine months following this offering, we intend to register up to 1,899,875 shares of common stock that are authorized for issuance under our stock option plans. As of May 15, 2005, 899,875 shares were subject to outstanding options, of which 446,675 shares were vested. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above and restrictions on our affiliates.

     You will incur immediate and substantial dilution as a result of this offering.

      The initial public offering price is substantially higher than the book value per share of our common stock. As a result, purchasers in this offering will experience immediate and substantial dilution of $ l per share in the tangible book value of our common stock from the initial public offering price, based on the number of shares outstanding as of March 31, 2005. This is due in large part to earlier investors in the company having paid substantially less than the initial public offering price when they purchased their shares. Investors who purchase shares of common stock in this offering will contribute approximately l % of the total amount we have raised to fund our operations but will own only approximately l % of our common stock, based on the number of shares outstanding as of March 31, 2005. In addition, the exercise of currently outstanding options to purchase common stock and future equity issuances, including future public or private

securities offerings and any additional shares issued in connection with acquisitions, will result in further dilution.

      Upon the closing of this offering, provisions of our restated certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

      In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirors at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations stated in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Additional risks, uncertainties and factors, other than those discussed under “Risk Factors,” could also cause our actual results to differ materially from those projected in any forward-looking statements we make. We operate in a very competitive and rapidly changing environment in which new risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update or revise any forward-looking statements, or to so update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

USE OF PROCEEDS

      We estimate that we will receive net proceeds of approximately        l       from our sale of        l       shares of common stock at an assumed initial public offering price of $       l       per share, the mid-point of our filing range, after deducting underwriting discounts and commissions and estimated expenses of approximately $       l       , which includes our underwriter’s non-accountable expense allowance, legal, accounting, printing costs and expenses, and various fees associated with the registration and listing of our securities payable by us. If the underwriters exercise their over-allotment option in full, we will receive an additional $       l       after deducting $       l       for underwriting discounts and commissions.

      We intend to use these net proceeds approximately as follows:

      The amounts that we actually expend for working capital purposes will vary significantly depending on a number of factors. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering. While we have no present understandings, commitments or agreements to enter into any potential acquisitions, we may also use a portion of the net proceeds for the acquisition of, or investment in, technologies or products that complement our business. Pending the uses described above, we intend to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. We cannot predict whether the proceeds which we invest will yield a favorable return.

DIVIDEND POLICY

      We have never declared or paid cash dividends on our common stock. We currently intend to retain our cash for the development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future.

      Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions, including our earnings, financial condition, results of operations, level of indebtedness, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our board of directors’ ability to declare a dividend is also subject to limits imposed by Delaware law.

CAPITALIZATION

      You should read this capitalization table together with the sections of this prospectus entitled “Management’s Discussions and Analysis of Financial Condition and Results of Operations” and with the financial statements and related notes to those statements included elsewhere in this prospectus.

      The following table sets forth our capitalization as of March 31, 2005:

      None of the columns shown above reflect the following:

DILUTION

      If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share represents the amount of our common stockholders’ equity, less intangible assets, divided by the number of shares of our common stock outstanding. As of March 31, 2005, we had a net tangible book value of approximately $(3,925,630) or $(2.17) per share of common stock. Pro forma net tangible book value as of March 31, 2005 is $       l       or $       l       per common share. Assuming the sale by us of        l       shares of common stock offered in this offering at an assumed initial public offering price of $       l       per share, the mid-point of our filing range, and after deducting the underwriting discounts and commissions and estimated offering expenses, our as adjusted pro forma net tangible book value as of March 31, 2005, would have been $       l       , or $       l       per share of common stock. This represents an immediate increase in pro forma net tangible book value of $       l       per share of common stock to our existing stockholders and an immediate dilution of $       l       per share to the new investors purchasing shares in this offering. The following table illustrates this per share dilution:

      The following table sets forth on a pro forma as adjusted basis, as of March 31, 2005, the number of shares of common stock purchased from us (assuming conversion of all preferred stock into common stock), the total consideration paid and the average price per share paid by existing holders of common stock

(assuming conversion of all preferred stock into common stock) and by the new investors in this initial public offering, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

      Assuming all our outstanding options and the outstanding warrants are fully exercised, the shares purchased by the new investors would constitute        l            % of all shares purchased from us, and the total consideration paid by new investors would constitute        l            % of the total consideration paid for all shares purchased from us. In addition, the average price per share paid by new investors would be $       l       , and the average price per share paid by existing stockholders would be $3.08.

      In the preceding tables, the shares of our common stock exclude, as of March 31, 2005:

SELECTED FINANCIAL DATA

      The following summary financial data for the fiscal years ended December 31, 2000, 2001, 2002, 2003 and 2004 have been derived from our historical audited financial statements. The summary financial data for the three months periods ended March 31, 2004 and 2005 have been derived from our unaudited financial statements. The unaudited summary financial data include, in our opinion, all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly the financial position and results of operations for the periods presented. Our historical results for and prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period. The selected financial data shown below include revenues and related expenses for our DIFOTI® product, a non-invasive imaging device for the detection of dental cavities. We decided to discontinue all operations associated with our DIFOTI® product, effective as of April 5, 2005, in order to focus our resources and attention on the development and commercialization of MelaFind®. See the footnote to the Financial Statements relating to subsequent events included elsewhere in this prospectus. You should read the following selected financial information together with the financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

      The following table presents summary balance sheet data, derived from our historical audited financial statements. The table also presents summary balance sheet, derived from our historical unaudited financial statements, as of March 31, 2004 and March 31, 2005:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

      We are a medical device company focused on the design and development of a non-invasive, point-of-care instrument to assist in the early diagnosis of melanoma. Our flagship product, MelaFind® features a hand-held imaging device that emits multiple wavelengths of light to capture images of suspicious pigmented skin lesions and extract data. We currently do not have any commercialized products or any significant source of revenue, however, the financial results discussed below include the revenues and the related expenses associated with our DIFOTI® product, a non-invasive imaging device for the detection of dental cavities. We decided to discontinue all operations associated with our DIFOTI® product effective as of April 5, 2005, in order to focus our resources and attention on the development and commercialization of MelaFind®. We are currently seeking an acquirer for the DIFOTI® assets, and we do not expect to have any significant continuing responsibility for the DIFOTI® business after its disposition.

      Our revenue for the foreseeable future will depend on the commercialization of MelaFind® and may vary substantially from year to year and quarter to quarter. Our operating expenses may also vary substantially from year to year and quarter to quarter based on the timing of the clinical trial and patient enrollment. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied on as indicative of our future performance.

      We commenced operations in December 1989 as a New York corporation and re-incorporated as a Delaware corporation in September 1997. Since our inception, we have generated significant losses. As of March 31, 2005, we had an accumulated deficit of $15.1 million. We expect to continue to spend significant amounts on the development of MelaFind®. We expect to incur significant commercialization costs when we begin to introduce MelaFind® into the US market. Accordingly, we will need to generate significant revenues to achieve and then maintain profitability.

      Most of our expenditures to date have been for research and development activities and general and administrative expenses. Research and development expenses represent costs incurred for product development, clinical trials and activities relating to regulatory filings and manufacturing development efforts. We expense all of our research and development costs as they are incurred.

      Our research and development expenses incurred through March 31, 2005 were expenses related primarily to the development of MelaFind®. We expect to incur additional research and development expenses relating to MelaFind® prior to its commercial launch in the US and selected markets outside the US. These additional expenses are subject to the risks and uncertainties associated with clinical trials and the FDA regulatory review and approval process. As a result, these additional expenses could exceed our estimated amounts, possibly materially.

      Marketing, general and administrative expenses consist primarily of salaries and related expenses, general corporate activities and costs associated with our efforts to obtain PMA approval for MelaFind®and building a commercial infrastructure to market and sell MelaFind®. We anticipate that general and administrative expenses will increase as a result of the expected expansion of our operations, facilities and other activities associated with the planned expansion of our business, together with the additional costs associated with

operating as a public company. We expect marketing, general and administrative expenses to increase as we build our sales force and marketing capabilities to support placing MelaFind® in selected markets.

      At December 31, 2004, we had available a net operating loss carryforward for federal income tax reporting purposes of approximately $12.2 million. The net operating loss carryforward may be available to offset future taxable income expiring at various dates through the year 2024. The Company’s ability to utilize its net operating losses may be significantly limited due to changes in the company’s ownership as defined by federal income tax regulations.

Critical Accounting Policies and Significant Judgments and Estimates

      Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the US. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our judgments related to accounting estimates. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      While our significant accounting policies are more fully described in Note 1 to our financial statements appearing at the end of this prospectus, we believe that the following accounting policies and significant judgments and estimates relating to revenue recognition, stock-based compensation charges, and accrued expenses are most critical to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

      Revenue from the DIFOTI® product sales is recognized at the time of delivery and acceptance, after consideration of all the terms and conditions of the customer contract. The DIFOTI® products which were being sold prior to December 31, 2004 included a 30-day return policy. Revenue on these products is recognized after the shipment is made and the 30-day return period has elapsed. DIFOTI® products sold subsequent to December 31, 2004 were sold without a right of return and revenue is therefore recognized after the shipment is made. Deferred revenues at each respective balance sheet date consist of revenues that were billed or paid in advance of the shipment of the product. During April 2005 the company discontinued the sale of the DIFOTI® product line.

Stock-Based Compensation

      We account for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the equity instruments issued in accordance with the Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services.”

      We account for stock-based compensation to employees under the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and disclose the effect of the differences which would result had we applied the fair-value-based method of accounting, on a pro forma basis, as required by FASB Statement No. 123, “Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure.” In December 2004, FASB issued FASB Statement No. 123R, which addresses the accounting for share-based awards to employees and requires companies to recognize the fair value of stock options and other stock-based compensation to employees in their statement of operations. Because we currently account for our stock-based compensation plans in accordance with APB Opinion No. 25, the adoption of FASB Statement No. 123R will have a material effect on our financial statements in future accounting periods.

      Our common stock has not been publicly traded and the determination of the fair value of our common stock involves considerable judgment. In making this determination, we evaluated, among other things, our common stock transactions, the pricing of private equity sales, the rights and preferences of the security being valued, current market conditions, and company specific operational milestones.

Accrued Expenses

      As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service where we have not been invoiced or otherwise notified of the actual cost. This is done as of each balance sheet date in our financial statements. Examples of estimated accrued expenses include:

      In connection with such service fees, our estimates are most affected by our projections of the timing of services provided relative to the actual level of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we under or over estimate the level of services performed or the costs of such services, our actual expenses could differ from such estimates. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services are often subjective determinations. We make these judgments based upon the facts and circumstances known to us in accordance with accounting principles generally accepted in the US.

Results of Operations (in thousands)

      Revenue. Revenue for the three months ended March 31, 2005 was $88 compared to $91 for the same period in 2004. The revenue for both periods represents the sales of our DIFOTI® product, a non-invasive imaging device for the detection of dental cavities.

      Gross Profit. Gross profit increased by $9 to $80 for the three months ended March 31, 2005 from $71 for the three months ended March 31, 2004. Expressed as a percentage of sales, the gross profit increased to 91% for the three months ended March 31, 2005 compared to 78% for the three months ended March 31, 2004.

      Research and Development Expense. Research and development expense increased by $329 to $636 for the three months ended March 31, 2005 from $307 for the three months ended March 31, 2004. Of this increase, $173 was attributable to higher personnel and personnel related costs as we increased headcount to support our research and development programs and $129 relates to increased consulting and outside research fees for the development of our MelaFind® product, a non-invasive, point-of-care instrument to assist in the early diagnosis of melanoma.

      Selling, General and Administrative Expense. Selling, general and administrative expense increased by $180 to $713 for the three months ended March 31, 2005 from $533 for the three months ended March 31, 2004. The increase is primarily due to higher personnel and personnel related costs of $155 associated with the addition of key management positions and $20 related to increased consulting fees.

      Interest (Income)/ Expense. Interest (income)/expense for the three months ended March 31, 2005 was ($26) compared to $1 for the corresponding period in 2004. The increase was due to higher average cash, cash equivalents and marketable securities balance during 2005.

      Revenue. Revenue for the year ended December 31, 2004 was $364 compared to $375 for the corresponding period last year. The revenue for both periods represents the sales of our DIFOTI® product, a non-invasive imaging device for the detection of dental cavities.

      Gross Profit. Gross profit decreased by $94 to $198 for the year ended December 31, 2004 from $292 for the year ended December 31, 2003. Expressed as a percentage of sales the gross profit decreased to 54% for the year ended December 31, 2004 compared to 78% for the year ended December 31, 2003.

      Research and Development Expense. Research and development expenses increased by $1,064, from $828 for the year ended December 31, 2003 to $1,892 for the year ended December 31, 2004. This increase relates to increased headcount to support our research and development programs in the amount of $715, and $332 represents increased consulting and outside research fees related to the development of MelaFind®. For the year ended December 31, 2004 research and development costs were approximately 50% of total operating expenses. Clinical and regulatory expense, a component of research and development expense, totaled approximately $797 for the year ended December 31, 2004. We expect our research and development expenses to increase in connection with our clinical trials and other development activities as we advance our MelaFind® pivotal study and complete the PMA regulatory approval process.

      Selling, General and Administrative Expense. Selling, general and administrative expenses increased by $519, to $1,858 for the year ended December 31, 2004 from $1,339 for the year ended December 31, 2003. The increase was principally attributable to higher DIFOTI® marketing and sales expenses of $100, an increase in personnel and personnel related costs of $63 associated with additions to the management team, $150 in stock-based compensation to non-employee board members, and $193 in stock-based payments for consulting services. For the year ended December 31, 2004 marketing general and administrative expenses were approximately 50% of total operating expenses. We expect that marketing expenses will increase to support efforts to obtain PMA approval and commence the commercialization of MelaFind®. In addition, our general and administrative expenses will increase to support the additional costs associated with being a public company.

      Interest (Income)/ Expense. Interest (income)/expense for the year ended December 31, 2004 was $67 compared to $75 for the corresponding period in 2003. The decrease was due to an imputed interest charge of $80 related to the series C private placement during 2004.

      Revenue. Revenue for the year ended December 31, 2003 was $375 compared to $690 for the corresponding period in 2002. The sales of our DIFOTI® product, a non-invasive imaging device for the detection of dental cavities, were $375 for the year ended December 31, 2003 and $143 for the year ended December 31, 2002. In addition, grant revenue was recognized for the year ended December 31, 2002 in the amount of $547.

      Gross Profit. Gross profit increased by $252 to $292 for the year ended December 31, 2003 from $40 for the year ended December 31, 2002. For the year ended December 31, 2002, the cost of goods sold includes all the expenses attributable to the grant revenue.

      Research and Development Expense. Research and development expenses increased $424 to $828 for the year ended December 31, 2003 from $404 for the year ended December 31, 2002. Of this increase, $280 was principally attributable to personnel and personnel related costs that specifically supported the grant program in 2002 and were classified as cost of goods sold in 2002 and $93 related to an increase in other consulting and outside research fees for the development of our MelaFind® product, a non-invasive, point-of-care instrument to assist physicians in the early diagnosis of melanoma. For the year ended December 31,

2003 research and development costs were approximately 38% of total operating expenses. Clinical and regulatory expense, a component of research and development expense totaled approximately $50 for the year ended December 31, 2003.

      Selling, General and Administrative Expense. Selling, general and administrative expenses increased by $570 to $1339 for the year ended December 31, 2003 from $769 for the year ended December 31, 2002. The increase was principally attributable to personnel and personnel related costs of $488 that supported the grant program in 2002 and were classified as cost of goods sold in 2002 and the addition of two DIFOTI® marketing and sales positions. For the year ended December 31, 2003 marketing, general and administrative expenses were approximately 62% of total operating expenses.

      Interest (Income)/ Expense. Interest (income)/expense for the year ended December 31, 2003 was $75 compared to $8 for the corresponding period in 2002. The increase was due to a charge of $45 associated with the value of the beneficial conversion feature for a promissory note during 2003.

Liquidity and Capital Resources (in thousands)

      From inception, we have financed our operations primarily through the use of working capital from private placements of equity securities and by applying for and obtaining a series of National Institute of Health Small Business Innovative Research grants and similar grants. To date, we have not borrowed (other than by issuing convertible notes, all of which have been converted into equity) or financed our operations through significant equipment leases, financing loans or other debt instruments. As of March 31, 2005, we had $5,300 in cash, cash equivalents and marketable securities as compared to $6,703 at December 31, 2004. Our cash, cash equivalents and marketable securities are liquid investments with a maturity within one year and consist of investments in money market funds with a commercial bank and short-term commercial paper and government obligations.

      Cash Flows from Operating Activities. Net cash used in operations was $1,382 for the three months ended March 31, 2005. For the years ended December 31, 2002, 2003 and 2004 the net cash used in operations was $684, $1,699, and $3,065 respectively. For all periods, cash used in operations was attributable primarily to net losses after adjustment for non-cash charges related to depreciation and other changes in operating assets and liabilities.

      Cash from Investing Activities. Net cash provided by our investing activities was $1,464 for the three months ended March 31, 2005 principally relates to the redemption of investments. For the years ended December 31, 2002, 2003 and 2004 the net cash provided by (used in) investing activities was $518, $(8) and $(6,677) respectively. The increase in cash used in investing activities in the years ended December 31, 2003 and 2004 was principally related to the net purchase of investments and equipment from the proceeds of our private placement financings. Cash used in investing activities for the year ended December 31, 2002 reflected the redemption of investments.

      Cash Flows from Financing Activities. Net cash provided by financing activities was zero for the three months ended March 31, 2005. For the years ended December 31, 2002, 2003 and 2004 the net cash flows provided by financing activities was zero, $1,816 and $9,733 respectively. For these periods, financing cash flows reflected the proceeds from the issuance of common stock, and preferred stock.

Operating Capital and Capital Expenditure Requirements

      To date, we have not commercialized our principal product, MelaFind®. We anticipate that we will continue to incur net losses for the foreseeable future as we continue to develop the MelaFind® system, expand our clinical development team and corporate infrastructure, and prepare for the potential commercial launch of MelaFind®. We do not expect to generate significant product revenue until we successfully obtain PMA approval for and begin selling MelaFind®. We believe that the net proceeds from this offering, together with our current cash, cash equivalents and marketable securities and interest we earn on these balances, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures through mid 2008. If existing cash and cash generated from this offering are insufficient to satisfy our liquidity requirements, or if

we develop additional products, we may seek to sell additional equity or debt securities or obtain a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock, and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of, delay or eliminate some or all of planned product research development and commercialization activities, which could harm our business.

      Because of the numerous risks and uncertainties associated with the development of medical devices such as MelaFind®, we are unable to estimate the exact amounts of capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, including, but not limited to:

Contractual Obligations

      The following table summarizes our outstanding contractual obligations as of December 31, 2004 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:

Payments Due by Period

(dollars in thousands)

      Our long-term obligations are two non-cancelable operating leases for space expiring June 2005 and November 2010. The lease on 3,700 square feet of office, laboratory and assembly space expires in June 2005. We have orally agreed with the landlord to extend this lease through June 2009 and we intend to enter into a lease agreement which will evidence this extension. The lease on 2,800 square feet of office space expires November 2010.

Related Party Transactions

      For a description of our related party transactions, see the “Related Party Transactions” section of this prospectus.

Off-Balance Sheet Arrangements

      We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Quantitative and Qualitative Disclosures about Market Risk

      Our exposure to market risk is confined to our cash equivalents and short-term investments. We invest in high-quality financial instruments; primarily money market funds, federal agency notes, and asset-backed securities, with the effective duration of the portfolio within one year which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

Recent Accounting Pronouncements

      In May 2003, FASB issued Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). This statement establishes how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, including redeemable convertible preferred stock. This statement is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the interim period commencing July 1, 2003, except for mandatorily redeemable financial instruments of nonpublic companies. FASB has indefinitely deferred implementation of some provisions of SFAS No. 150. The adoption of SFAS No. 150 did not have a material effect on our financial position or results of operations.

Quarterly Results of Operations

      The following table sets forth unaudited financial and operating data in each fiscal quarter during 2003 and 2004. The unaudited quarterly information reflects all adjustments, which include only normal and recurring adjustments necessary to present fairly the information shown.

OUR BUSINESS

Overview

      We are a medical device company focused on the design and development of a non-invasive, point-of-care instrument to assist in the early diagnosis of melanoma. Our flagship product, MelaFind® features a hand-held imaging device that emits multiple wavelengths of light to capture images of suspicious pigmented skin lesions and extract data. The data are then analyzed against our proprietary database of melanomas and benign lesions using our sophisticated algorithms in order to provide information to the physician and produce a recommendation of whether the lesion should be biopsied.

      The components of the MelaFind® system include:

      We have entered into a binding Protocol Agreement with the FDA which is an agreement for the conduct of the pivotal trial in order to establish the safety and effectiveness of MelaFind®. We believe the presence of the Protocol Agreement significantly enhances our ability to expedite the FDA approval process. Management estimates that the study will commence in early 2006 at over 20 US clinical study sites, and anticipates PMA approval to commercialize MelaFind® in 2007.

      Cancers of the skin have a higher incidence than all other cancers combined, and the rates are rising dramatically. Melanoma is responsible for approximately 80% of skin cancer fatalities and is the deadliest of all skin cancers as there is currently no cure for advanced stage melanoma. However, early detection of skin cancers like melanoma can lead to virtually a 100% cure rate. Advanced stage melanoma is costly to treat and is responsible for approximately 90% of the total spending on melanoma treatment in the US, costing up to $170,000 per patient. If diagnosed early, however, melanoma is almost always cured by simple resection at a cost of approximately $1,800 per patient.

      Because early detection is critical to survival, the American Cancer Society recommends that individuals age 40 years and older have complete skin examinations on an annual basis. According to the 2000 US Census data, over 100 million Americans in the US are over age 40. Furthermore, there are more than 20 million individuals in the US who have dysplastic nevi, a type of pigmented skin lesion that when present is associated with an increased risk of melanoma. These individuals warrant more frequent observation.

      Melanomas are mainly diagnosed by dermatologists and/or primary care physicians using visual clinical evaluation. Physicians assess pigmented skin lesions using the “ABCDE” criteria, Asymmetry, Border irregularity, Color variation, Diameter greater than 6 mm, and Evolving — change in ABCD over time. This assessment is subjective and results in missed melanomas, as well as a ratio of benign lesions biopsied to melanomas confirmed that is highly variable and as high as 40 to 1 for dermatologists and as high as 50 to 1 for primary care physicians.

      To date, MelaFind® has been studied on over 5,000 skin lesions from over 3,500 patients at over 20 clinics. Our clinical studies have demonstrated that MelaFind® missed fewer melanomas and produced fewer false positives than experienced by study dermatologists, who are skin cancer specialists. The performance of a diagnostic is measured in terms of “sensitivity” (the ability to detect disease when disease is present) and “specificity” (the ability to exclude disease when disease is not present). In the largest blinded trial that we have performed to date on 352 suspicious pigmented skin lesions, using our most advanced system,

MelaFind® did not miss a melanoma (measured sensitivity of 100%) and achieved 48.4% specificity compared to the study dermatologists’ sensitivity of 96.4% and specificity of 28.4%.

      We believe that with the assistance provided by MelaFind®, physicians could diagnose more melanomas at the earliest, curable stage, which would reduce both treatment costs and the number of unnecessary biopsies, and improve quality of life.

      Our objective is for MelaFind® to become an integral part of the standard of care in melanoma detection.

The Market Opportunity

      Cancer of the skin (nonmelanoma and melanoma skin cancers combined) is the most common of all cancers, projected to be over 1.3 million cases in 2005 and estimated to account for more than 50% of all cancers. There are three significant forms of skin cancer: basal cell, accounting for approximately 75% of skin cancer; squamous cell, totaling approximately 20%; and melanoma, which accounts for an estimated 4% of skin cancer cases, but is responsible for approximately 80% of all deaths from skin cancer. The American Cancer Society projects 10,600 deaths from skin cancer in 2005 — 7,800 from melanoma and 2,800 from other skin cancers. Since 1973, the mortality rate for melanoma has increased by 50%. Since approximately 62% of melanomas and 45% of melanoma deaths occur prior to age 65, melanoma places significant burdens on the healthcare system well beyond Medicare.

      Melanoma, if left untreated, can be fatal. If diagnosed and removed early in its evolution, when confined to the outermost skin layer and deemed to be “in situ,” it is virtually 100% curable. Invasive melanomas that are thin and extend into the uppermost regions of the second skin layer still have excellent cure rates (greater than 90%). However, once the cancer advances into the deeper layers of skin, the risk of metastasis (spreading to other parts of the body) increases. Metastases can occur when the tumor enters into lymphatic channels and newly formed blood vessels, potentially resulting in significant morbidity (illness) and mortality (death). Once the cancer has advanced and metastasized to other parts of the body, it is difficult to treat. At this advanced stage, the five year survival rate is reported to be only 10%. Moreover, survival prospects for those with advanced melanoma have not improved over the past three decades.

      Melanoma is currently the subject of significant attention in the medical community. In part, this attention is due to the fact that it is the fastest growing cancer. It is also the most common cancer in young adults ages 20-30, and currently there are more new cases of melanoma than HIV/ AIDS. In women ages 20-29, melanoma is the primary cause of cancer death. In women ages 30-35, melanoma is the second leading cause of death after breast cancer. Recent published papers identify a strong correlation between breast cancer and melanoma.

      Because early detection is critical to survival, the American Cancer Society recommends that individuals 40 years and older have complete skin examinations on an annual basis. The 2000 US Census indicates that there are over 100 million Americans over the age of 40 in the US. Furthermore, there are more than 20 million individuals in the US who have dysplastic nevi, a type of pigmented skin lesion that when present is associated with an increased risk of melanoma. Such individuals warrant more frequent observation.

Our Strategy

      Our objective is for MelaFind® to become an integral part of the standard of care in melanoma detection. To achieve this objective, we are pursuing the following strategy:

Limitations of Current Melanoma Diagnosis

      The current primary method for detecting melanoma is based on physicians’ ability to recognize patterns using the naked eye; this is known as clinical examination. Physicians assess pigmented skin lesions using the “ABCDE” criteria, Asymmetry, Border irregularity, Color variation, Diameter greater than 6 mm, and Evolving — change in ABCD over time. This subjective interpretation relies on physician experience and skill. The ratio of benign lesions biopsied to melanomas confirmed can be variable, ranging as high as 40 to 1 for dermatologists and as high as 50 to 1 for primary care physicians. In contrast, MelaFind® delivers an objective assessment based on numerical scores assigned to the suspicious skin lesion under evaluation. Further, clinical examination is limited to the surface appearance of the suspicious pigmented skin lesion, whereas MelaFind® utilizes information derived from up to 2.5 mm deep into the skin.

      Dermatologists who specialize in the management of pigmented skin lesions may also use dermoscopy, a method of viewing lesions under magnification. Although dermoscopy provides more information than unaided visual examination, mastery of the technique necessitates many years of training and experience. Proper use of dermoscopy can reduce the number of unnecessary biopsies of benign lesions, but even dermoscopy experts biopsy 3-10 benign lesions for every melanoma detected.

      Most dermatologists generally use only visual clinical evaluation for melanoma detection. Consequently, they biopsy up to 40 benign lesions for every melanoma detected. While many primary care physicians immediately refer patients with suspicious pigmented skin lesions to a specialist, an increasing number perform biopsies on skin lesions themselves. Their lack of specialist training in identifying suspect lesions makes their diagnostic accuracy much lower in terms of both sensitivity and specificity. This results in 40% misdiagnosed melanomas and a ratio of benign lesions biopsied to melanomas confirmed of up to 50 to 1.

MelaFind® Product Description

      MelaFind® is a non-invasive system for assisting in the early detection of melanoma. The MelaFind® system is comprised of a point-of-care, hand-held imaging device that, in commercial use, is intended to be connected via the internet to a central server in our offices. MelaFind® employs multiple wavelengths of light to obtain data from images of suspicious lesions; the data are analyzed against our proprietary database of melanomas and benign lesions using our sophisticated algorithms. When marketed, a report will be

transmitted to the physician’s office containing MelaFind®’s recommendation of whether the lesion should be biopsied. The key components of the MelaFind® system are listed below:

      A hand-held imaging device, which is comprised of several components:

      The “brain” of the MelaFind® system, the Lesion Classifier, distinguishes melanoma from non-melanoma using the lesion features extracted and measured by the hand-held imaging device. The Lesion Classifiers are developed from our proprietary database of pigmented skin lesions and sophisticated mathematical algorithms. The mathematical formulas and algorithms used by the Lesion Classifiers are devised and optimized through the process of “classifier training” using lesions from our proprietary database. Lesion Classifier development and training is an iterative process involving: (1) selection of the lesion features that provide for optimal lesion discrimination; (2) optimization of the mathematical formulas to differentiate benign lesions from melanoma; and (3) expansion of the size and diversity of our proprietary lesion database. The performance of the Lesion Classifiers is directly related to the size of the database used in classifier training, as well as the degree to which the training database is representative of the lesions that will be evaluated by MelaFind® in commercial use.

      As with many diagnostic systems, the diagnostic performance of MelaFind® is characterized using two measures: (1) sensitivity  — the ability to detect disease when it is present; and (2) specificity  — the ability to exclude disease when it is not present. Since sensitivity and specificity are typically trade-offs, meaning that as one parameter increases the other decreases, the MelaFind® Lesion Classifier is developed and trained with the intention that MelaFind® will detect all melanomas in the training data set with the highest possible specificity.

      Reliable functioning of the MelaFind® system is critical to its utility and success in the marketplace. Automated self-calibration tests are performed by the hand-held device to ensure proper functionality. When marketed, the central server will also perform tests on the hand-held device to determine whether its functioning is within appropriate limits. The server will not permit MelaFind® to provide diagnostic information unless the hand-held device is functioning properly.

MelaFind® Regulatory Status

      In late 2004, we entered into a binding Protocol Agreement with the FDA for our pivotal clinical study that specified the inclusion criteria, sample size, endpoints, and performance criteria necessary to establish the safety and effectiveness of MelaFind®. The primary endpoints of the study include: (1) greater than 95% (exact binomial lower confidence bound) sensitivity for detection of melanoma; and (2) statistically significant greater specificity in ruling out melanoma when compared to study dermatologists. We initiated a trial under the terms of the Protocol Agreement at the end of 2004. However, technical operational issues with the systems were experienced, requiring further refinement. We are continuing this study as a supportive

pilot trial and are refining the hardware systems. We expect to have new systems available in order to start the pivotal trial in early 2006. The pivotal study for PMA approval of MelaFind® will be conducted under the terms of the Protocol Agreement, which require at least 1,200 pigmented skin lesions, and at least 93 eligible melanomas for analysis.

      For commercialization outside the US, approvals from appropriate regulatory bodies within other countries will be required. Once PMA approval is obtained, we may proceed with applications to commercialize in various countries pending further assessment of market opportunities and the possible identification of strategic partners.

Clinical Studies of MelaFind®

     Goals and Objectives

      MelaFind® has been studied on over 5,000 skin lesions from over 3,500 patients during the past five years at over 20 clinical sites in the US, as well as two sites in Europe and one in Australia. We aim to develop a system with a sensitivity of at least 95% in detecting melanoma. Our goals are to complete pre-commercialization design and testing of the hand-held imaging device and its associated software, as well as to establish a database of approximately 300 melanomas, including in vivo MelaFind® images and biopsy results, for MelaFind® Lesion Classifier algorithm development and training. Statistically, in order to have a high level of confidence of success, we set the exact binomial lower confidence bound (ELCB) at 99%, which requires approximately 300 melanomas in the classifier training database. To date, the MelaFind® lesion database includes 225 melanomas.

      We are developing in parallel several MelaFind® Lesion Classifiers, which differ in the algorithms, as well as in the specific lesion features and relative weights used in the mathematical formulas. Prior to conducting the analysis of the data from the pivotal trial under the Protocol Agreement, the optimal Lesion Classifier will be selected. The primary means by which the performance of the MelaFind® Lesion Classifiers is evaluated is through measures of sensitivity (the ability to detect disease when present) and specificity (the ability to exclude disease when not present).

      The reference standard used for comparison of the results of MelaFind® and study dermatologists is histopathological analysis of the biopsied lesions by a group of expert dermatohistopathologists. MelaFind® images of pigmented skin lesions (melanomas and non-melanomas) and the histopathological results of the corresponding biopsied lesions comprise our training database of lesions. When the Lesion Classifiers are tested on the database used in training, this is called a “training study.” When the Lesion Classifiers are tested on a set of lesions not used in training, this is called a “blinded test,” which is a simulation of anticipated real-life prospective classifier performance.

      Our ultimate goal for MelaFind® is to demonstrate sensitivity of at least 95%, and superior specificity as compared to study dermatologists in the pivotal blinded test for PMA approval.

     MelaFind® Development History — Hardware and Software

      In developing the MelaFind® system we have tested both a first and second generation hand-held imaging device, and are in the process of developing a pre-commercialization version for use in our pivotal clinical trial. Our research, development and clinical testing efforts have been designed to improve our MelaFind® technology platform, including the imaging device and lesion classifiers, and to enhance our lesion database.

      We began using first generation hand-held imaging devices in clinical studies in 2001. In 2002, we expanded the clinical research program to additional study sites equipped with second generation hand-held imaging devices. The aim of the study, which is ongoing, is to build the MelaFind® proprietary lesion database for use in Lesion Classifier training. The study calls for the MelaFind® hand-held imaging device to acquire images of pigmented skin lesions scheduled for biopsy. After biopsy, the histopathological slides are collected and sent for central dermatohistopathological review by a panel of experts.

      The results of initial training studies and blinded tests were not to the expected level of performance. We determined the cause to be a flaw in the second generation hand-held imaging devices, which were subsequently shown to exhibit highly variable levels of stray light, an optical artifact. Therefore, we ceased producing this generation of hand-held imaging devices and purged the training database of lesion images acquired with them. We also incorporated a manufacturing specification for stray light which, prior to this time, was not included. Subsequent training studies and blinded tests performed using only first generation hand-held imaging devices confirmed our earlier favorable results: MelaFind® missed none or very few melanomas, and was shown to have higher specificity than study dermatologists, as shown in the tables below. See “ — Results of Training Studies and Blinded Tests”.

      We initiated a clinical study under the terms of the Protocol Agreement with the FDA in late 2004 using first generation hand-held imaging devices. However, several technical operating issues with these older systems were experienced, requiring further refinement. Third generation hand-held imaging devices were produced in 2004 and early 2005. These serve as the basis of the design that is currently being used to generate final, pre-commercialization hand-held imaging devices, which will be utilized in the pivotal study for PMA approval under the terms of the Protocol Agreement.

      Along with hardware development efforts, we have also developed, tested, and continue to refine the software components of the system, including lesion filters, calibration algorithms, lesion classification algorithms, and hardware normalization software. We plan to finalize these key elements of the software prior to the analysis of the data obtained from the pivotal trial for PMA approval.

     Results of Training Studies and Blinded Tests

      The first iteration of MelaFind® Lesion Classifiers, Lesion Classifiers A-1 and B, employed a single-step process, that is, an algorithm that differentiates melanoma from all other pigmented skin lesions. These MelaFind® classifiers were trained on a total of 1,129 lesions  — 109 melanomas, 70 high grade dysplastic nevi, and 950 other pigmented skin lesions. For the blinded test, a different group of 477 pigmented skin lesions, including 26 melanomas, 11 high grade dysplastic nevi, and 440 other lesions were included. None of these lesions were used in classifier training. The results of the training study and blinded tests for MelaFind® Lesion Classifiers A-1 and B, as well as study dermatologists, are summarized below.

August 2003 — Training Study and Blinded Test Results

      The performance of the MelaFind® Lesion Classifiers on the blinded data set was significantly below results from the training study. The first attempt to improve the performance was by developing a new MelaFind® Lesion Classifier A, employing a three-step process (A-3), which was accomplished in November 2003. A three-step process employs algorithms that differentiate melanoma from three other classes of pigmented skin lesions. The new classifier was re-trained on the original data set of lesions (109 melanomas, 70 high grade dysplastic nevi, and 950 other pigmented skin lesions), tested on the training set and then tested on the same blinded data set used in August 2003 (26 melanomas, 11 high grade dysplastic nevi, and 440 other lesions). The following table summarizes the results of the tests on the training and blinded data sets. Note that MelaFind® Lesion Classifier B, which accommodates a single-step process only, was not evaluated in these exercises.

November 2003 — Training Study and Blinded Test Results

      Review of the data indicated that the three-step MelaFind® Lesion Classifier A-3, which was trained with lesions acquired from first and second generation MelaFind® hand-held imaging devices, was much less specific on the training database (28.5%) than the single-step classifier MelaFind® Lesion Classifier A-1, which was trained on lesions acquired using only first generation hand-held imaging devices (45.6%). A complete analysis of all MelaFind® devices from the clinical sites indicated a systematic difference between the first generation and second generation MelaFind® hand-held imaging devices. The second generation hand-held imaging devices exhibited a significantly greater amount of stray light than the first generation hand-held imaging devices. Stray light induces variable imaging artifacts that cannot be predicted or accounted for in the software algorithms, and introduces higher probability for error. Therefore, in February 2004, all lesions acquired using second generation hand-held imaging devices were removed from the training and testing databases. The three-step MelaFind® Lesion Classifier A-3 was then trained on a set of lesions acquired solely from first generation hand-held imaging devices including 113 melanomas, 69 high grade dysplastic nevi, and 987 other pigmented skin lesions. A blinded test was conducted on 262 lesions (21 melanoma, 8 high grade dysplastic nevi, and 233 other lesions) not used in classifier training and acquired using first generation hand-held imaging devices only. The following table summarizes the results.

February 2004 — Results of Training Study and Blinded Test after Removing Lesions

Obtained from Second Generation Hand-Held Imaging Devices

      These results demonstrated the importance of minimizing stray light and establishing a product specification for stray light. This specification was instituted in our assembly process following this analysis. As part of the continued development, a four-step MelaFind® Lesion Classifier A-4 was introduced in March 2004. A four-step process employs algorithms that differentiate melanoma from four other classes of pigmented skin lesions. This classifier performed better compared with the three-step classifier, as summarized in the following table.

March 2004 — MelaFind® Lesion Classifiers: Three-step vs. Four-step

Training Study and Blinded Test Results

      Due to the enhanced specificity of the four-step classifier A-4 compared to the three-step classifier A-3, as seen in the preceding table, the four-step classifier was selected for further development and testing. In May 2004, the largest blinded test was performed on a separate set of 352 lesions (including 28 melanomas, 14 high grade dysplastic nevi, and 310 other pigmented skin lesions) that were not used in classifier training. The results of sensitivity and specificity of MelaFind® Lesion Classifiers A-4 and B and study dermatologists are summarized in the following table.

May 2004 — Training Study and Blinded Test Results

      In January 2005, with no additional classifier training and in an effort to rigorously test the limits of the MelaFind® Lesion Classifiers, another blinded test was performed on 228 new lesions (28 melanomas, 4 high grade dysplastic nevi, and 196 other pigmented skin lesions). The lesions in this blinded test were acquired from the first generation MelaFind® hand-held imaging devices that had been at the clinical sites for a longer period of time than in any blinded test to date. Lesion Classifier training was not performed using MelaFind® hand-held imaging devices that had been at the clinical sites for longer periods of time. A new four-step MelaFind® Lesion Classifier C-4 with a revised step was also evaluated in the blinded test. The results are summarized in the following table.

January 2005 — Second Blinded Test Results using March 2004 Classifiers

      In evaluating the MelaFind® hand-held imaging devices used in the January 2005 blinded test, we found that several MelaFind® devices were not performing within specifications. Had these devices performed within specifications, we believe that the sensitivity of MelaFind® Lesion Classifiers A-4 and C-4 would have been 96.4%, that is, they would have missed a single melanoma, compared to study dermatologists who missed two melanomas.

      We are utilizing the findings of the blinded tests to refine the design of hardware to further develop the lesion classification algorithms, to expand the training database, and to develop improved calibration methods to ensure appropriate functioning of each hand-held imaging device. As demonstrated in the January 2005 blinded test, melanomas can be missed when MelaFind® systems that do not meet specifications are used to acquire images, and when melanoma lesion types (for instance, nodular melanomas) are not adequately represented in the training database. In order to address these situations, we have: (1) incorporated a weekly field calibration test to evaluate system performance in order to identify and disable MelaFind® systems that are not functioning within specifications; (2) intensified our effort to obtain images of nodular melanomas for inclusion in the targeted 300 melanoma database for the final Lesion Classifier; and (3) refined our algorithms to result in either a positive reading of melanoma when MelaFind® images reveal characteristics well outside the ranges of lesions in the final training database, or to report that MelaFind® cannot provide a diagnosis in this circumstance. As mentioned above, had these devices performed within specifications, we believe that the sensitivity of MelaFind® Lesion Classifiers A-4 and C-4 would have been 96.4%, that is, they would have missed a single melanoma, compared to study dermatologists who missed two melanomas.

Sales and Marketing

      We plan to offer MelaFind® as a point-of-care online service. This approach is intended to provide us with the advantage of recurring revenues corresponding to the number of patients examined and to provide the physician with access to our technology without having to make a significant capital investment.

      Our sales and marketing strategy is to initially establish focused sales, marketing, and distribution organization in North America. We plan to focus our commercialization efforts initially on “high volume/key opinion leader” dermatologists who are strongly focused on the diagnosis and treatment of melanoma. For the expansion to the larger US markets of general dermatologists, plastic surgeons, and primary care physicians, and for international markets, we intend to establish development and commercialization partnerships with

pharmaceutical and/or diagnostic device companies with an established competency in the market to accelerate the product introduction and to maximize the breadth of the commercial opportunity. At this time, we have not yet established any commercialization partnerships.

      We believe that the ultimate market for MelaFind® is in the primary care setting. When used by primary care physicians, MelaFind® could have a significant public health benefit and a favorable impact on healthcare costs. Primary care physicians are at the front line of early detection, but their lack of specialist training in identifying suspect lesions makes the achievement of a high level of diagnostic accuracy challenging. We believe that MelaFind® can significantly assist primary care physicians in improving their diagnostic acumen.

     The MelaFind® Value Proposition for the Healthcare System

      We are currently working with experts on a quantitative analysis of the value proposition of the use of MelaFind® by both dermatologists and primary care physicians using Evidence-Based Medicine evaluation techniques. This strategy is consistent with the approach that has been used to support positive coverage decisions by CMS and private payors for other products. The value drivers include: (1) the diagnosis of melanoma at the early curable stages, as opposed to advanced stages, allowing for both a greater opportunity to cure and a reduction in treatment costs by approximately 99%; and (2) reduced number of referrals for evaluation and biopsy of benign pigmented skin lesions. We believe that the use of MelaFind® could result in substantial savings to the US healthcare system.

     Our Reimbursement Strategy

      We are aware of no Current Procedural Terminology (CPT) code that is specifically applicable to the use of MelaFind®. Therefore, we have engaged the services of expert consultants with extensive experience in the CPT and coverage decision processes to assist us in the submission of appropriate applications to obtain a CPT code(s) and positive coverage decisions from CMS and private payors.

      In advance of obtaining a CPT code, we intend to extend our efforts to secure coverage by private payors and state Medicaid agencies. Securing coverage first through private payors and state Medicaid agencies is a common strategy for facilitating national Medicare coverage. Our efforts to secure reimbursement for services using MelaFind® will focus first on private payors and state Medicaid agencies, particularly in sunbelt locations and in areas that have been shown to be underserved by dermatologists.

      In the US, healthcare providers that utilize medical systems such as MelaFind®, generally rely on third-party payors, including Medicare, Medicaid, private health insurance carriers, and managed care organizations, to reimburse part, but not necessarily all, of the costs and fees associated with the procedures performed using these devices. Public and professional concern about the cost of medical care and new technologies has evoked a variety of remedies. Third-party payors are increasingly challenging the pricing of medical products and procedures. Guidelines have been established that recognize the need for clinical strategies to assess the cost-effectiveness of new diagnostic tools or procedures (Evidence-Based Medicine), in the hope of reducing the variations in diagnostic and treatment protocols and reducing healthcare expenditures. Insurers are also attempting to curb utilization by applying a rational analysis of the costs versus benefits of new technologies.

      The Evidence-Based Medicine evaluation that we are undertaking is central to our efforts to obtain positive coverage decisions from CMS and private insurers. The importance of Evidence-Based Medicine is underscored by recent actions by CMS, including its proposed Covered with Evidence Development initiative designed to provide quicker access to new technologies for beneficiaries while assuring that appropriate evidence for final coverage decisions will be obtained.

      We recognize that a favorable reimbursement environment will have a significant impact on MelaFind®’s adoption and commercial success. Even if a procedure is eligible for reimbursement, the level of reimbursement may not be adequate. In addition, third-party payors may deny reimbursement if they determine that the device used in the treatment was not cost-effective or was used for a non-approved indication. We have

anticipated this need and have employed an active strategy to obtain medical coverage, identify appropriate coding and establish adequate payment.

      Pending approval of a CPT code and the availability of third party reimbursement, we plan to offer MelaFind® to physicians, who would pay for using MelaFind®, and may or may not charge patients directly for its use. In addition, we believe that roughly ten percent of all dermatological practices are focused on cosmetic dermatology. Most procedures performed in cosmetic dermatological practices and Medi-Spas are provided on a patient self-pay basis. We believe that healthcare consumers that seek these services are likely to pay for MelaFind®, as well.

Competition

      We are not aware of any direct competitors to MelaFind®. A number of systems for visualization and assessment of pigmented skin lesions are in use or in development. These include clinical (naked eye) examination, whole body mole mapping systems, dermoscopes (also known as “dermatoscopes”), digital dermoscopes, spectrophotometric intercutaneous analysis, confocal microscopy, and spectrophotometric (color) analysis. These systems rely on physician experience and expertise in recognizing patterns that are associated with melanoma and non-melanoma in order to render an interpretation and diagnosis.

      The current primary method for detecting melanoma relies on physicians to interpret whether a pigmented skin lesion is suspicious for melanoma (thereby requiring biopsy) based on their ability to recognize patterns using clinical examination. Physicians use the “ABCDE” criteria, Asymmetry, Border irregularity, Color variation, Diameter greater than 6 mm, and Evolving in ABCD, in their assessment. Whole body mole mapping consists of periodic photography of patients, typically those at high risk for developing melanoma. The pictures are reviewed clinically. This service is provided at some diagnostic imaging centers and dermatology offices. DigitalDerm, Inc. offers a computerized system for acquisition, storage, and review of the pictures.

      Dermoscopy, or epiluminescence microscopy, allows for non-invasive visualization of colors and microstructures of the epidermis, the dermal-epidermal junction, and the papillary dermis not visible to the naked eye. Manufacturers of dermoscopes include (but are not limited to) Welch Allyn, Inc. (US), Heine Optotechnik (Germany), and 3Gen, LLC (US). Digital dermoscopes allow for dermoscopic images to be visualized on a computer screen at larger magnification. In addition, images may be stored and compared to images taken previously. Manufacturers of digital dermoscopes include (but are not limited to) Derma Medical Systems, Inc. (Austria), ZN Vision Technologies AG (Germany), Polartechnics, Ltd. (Australia), Linos Photonics, Inc. (Germany), and Biomips Engineering (Italy). Dermoscopy is a tool used by approximately 25% of dermatologists in the US and is associated with a long learning curve. Physicians experienced in the use of dermoscopy have been shown to have an increased diagnostic accuracy of 10 to 20% over clinical examination. Although some digital dermoscopes provide information regarding the probability that a lesion may be melanoma compared to a database of lesions, no system, to our knowledge, is under PMA development for objective interpretation.

      A recent published article describes the results of a study utilizing the DB-Mips system from Biomips Engineering. The database of lesions used in this study differs significantly from our proprietary database. For example, our database includes seborrheic keratoses and pigmented basal cell carcinomas, which can be difficult to differentiate from melanoma. The DB-Mips database included none of these lesions. Further, our database includes many more melanomas that are minimally invasive as well as a much higher percentage of dysplastic nevi compared to the DB-Mips database. Minimally invasive melanomas are more difficult to diagnose than melanomas that have significantly invaded the skin, and dysplastic nevi can be very difficult to differentiate from melanoma. Thus, we believe that the DB-Mips database does not include as many pigmented lesions that are difficult to differentiate from melanoma as our database. The specificity of dermatologists in other DB-Mips studies was reported to be over 80% while the specificity of dermatologists in MelaFind® studies is typically under 30%. The DB-Mips system has a reported specificity of up to 79%, which is roughly equivalent to the specificity of the dermatologists in DB-Mips studies.

      Spectrophotometric intercutaneous analysis is a technique of visualizing collagen, blood, and pigment. Astron Clinica (UK) manufactures a device utilizing this technique. Confocal microscopy is an experimental approach for non-invasive visualization of skin structures at the cellular level; such a device utilizing this technique is in development by Lucid (US).

      A spectrophotometer (color measuring device) is offered by Medical High Technologies S.p.A. (Switzerland). In contrast to MelaFind®, the product does not perform automatic quality control of images and has an external light source. We believe that the reported sensitivity of 80.4% would not gain market approval. Further, we are not aware of comparative data on physicians’ performance in corresponding data sets. The system does not have PMA approval, nor are we aware of efforts directed to obtain PMA approval of the product.

      The broad market for precision optical imaging devices used for medical diagnosis is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. If our products are approved for marketing, we will potentially be subject to competition from major optical imaging companies, such as General Electric Co., Siemens AG, Bayer AG, Eastman Kodak Company, Olympus Corporation, Carl Zeiss AG Deutschland and others, each of which manufactures and markets precision optical imaging products for the medical market and could decide to develop or acquire a product to compete with MelaFind®.

Manufacturing

      We are currently focusing our manufacturing efforts on hardware engineering in order to make the functioning of the MelaFind® hand-held imaging devices more consistent and robust, and to facilitate larger-scale manufacturing methods of the pre-commercialization devices that will be used in the pivotal clinical trial. Data from the clinical studies as well as from engineering tests under stress and different environmental conditions are being used to refine appropriate manufacturing and field specifications before the design is fixed.

      For this crucial phase in development, we have contracted with a third-party vendor, ASKION (Gera, Germany), which specializes in precision optics. The pre-commercialization hand-held imaging devices to be assembled by ASKION are expected to be available for pivotal trial initiation planned for early 2006. The pre-commercialization hand-held imaging devices are expected to be more robust while having at least the same or better performance than the hand-held imaging devices used in the clinical program to date.

      We have recently been inspected by the FDA for the manufacturing and commercialization of DIFOTI®, our dental cavities detection product that has been discontinued for business reasons. The FDA inspectors observed deficiencies that were documented on FDA Form 483 that was issued to us following the inspection. We have had a follow-up meeting with the FDA and are working with the FDA and consultants to address the inspectional findings, particularly as they relate to current MelaFind® design development and ultimate MelaFind® commercial manufacturing. We believe that the issues can be addressed to the satisfaction of the FDA and will not materially adversely effect our operations.

Research and Development Efforts

      Our research and development efforts are currently focused on finalization and validation of the pre-commercialization hand-held imaging device, and completion of the development of the MelaFind® Lesion Classifiers. To date, we have developed and tested four-step classifiers (see “Results of Training Studies and Blinded Tests”), and we are currently working on five-step versions. The classifiers have been trained on 113 melanomas to date, and our goal is to use 300 melanomas (and over 4,000 non-melanoma pigmented lesions) for training. To date we have collected over 225 melanomas, which are available for classifier training.

      Our R&D plan also includes further improvements such as incorporating wireless technology and an internet connection for hand-held imaging device quality monitoring, as well as faster and easier software downloads for future software versions. The internet based monitoring of the performance of our hand-held imaging device, known as Intelligent Device Management, is intended to enable us to continuously monitor

our hand-held imaging device, advise the user of errors in handling, and thus enhance customer satisfaction and loyalty.

      We have performed feasibility studies of a MelaFind® software add-on feature called MelaMeter^tm, an enhancement to MelaFind® that provides information regarding the depth of penetration of a pigmented skin lesion. This information may be useful to physicians in determining the necessary depth and breadth of biopsy of a pigmented skin lesion. Initial clinical studies of MelaMeter^tm demonstrate the ability of MelaMeter^tm to non-invasively estimate the Breslow thickness comparably to histopathological examination of excised lesions. We plan to continue the development of MelaMeter^tm and seek its FDA approval after receiving PMA approval of MelaFind®.

      Following commercialization of MelaFind®, we intend to evaluate the potential use of our light based computer vision platform in other applications, including the non-invasive detection of basal cell carcinoma, the most common skin cancer. New hardware systems for the imaging of blood and blood vessel patterns are needed since the majority of basal cell carcinomas are not pigmented and, accordingly, the MelaFind® system as currently developed is not appropriate for this use. However, we believe MelaFind®’s software programs and algorithms will be applicable.

Intellectual Property

      Our policy is to protect our intellectual property by obtaining US and foreign patents to protect technology, inventions and improvements important to the development of our business. To date we have been awarded 14 US patents with numerous foreign counterparts, of which six US patents and two Australian patents relate to various aspects of MelaFind®. In addition, we have applied for two additional US patents and have filed certain foreign patent applications relating to MelaFind®, of which two foreign patent applications are currently in the European regional phase. Also, we have obtained non-exclusive licenses from several of our suppliers for critical components of MelaFind®. We have not granted any significant licenses with respect to our intellectual property.

      We cannot be certain that our patents will not be challenged or circumvented by competitors. Whether a patent is infringed and is valid, or whether a patent application should be granted, are all complex matters of science and law, and therefore we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications and other intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage.

      We also rely on trade secrets and technical know-how in the manufacture and marketing of MelaFind®. We require our employees, consultants and contractors to execute confidentiality agreements with respect to our proprietary information.

      We have obtained US trademark registrations for the following marks: “MelaFind®” and “DIFOTI®,” as well as the corporate logo for “eos-electro-optical sciences, inc.®” The goods covered by these registrations are in International Class 010 and US Classes 26, 39 and 44. For MelaFind®, the description of goods and services covered by the trademark is: “medical devices, namely, electro-optical devices incorporating hardware for obtaining images in different spectral bands and software for analyzing the images for use in analyzing skin lesions and determining the existence of melanoma.” For DIFOTI®, the description of goods and services covered by the trademark is: “electro-optical apparatus to diagnose dental conditions.” For “eos-electro-optical sciences, inc.®”, the description of goods and services covered by the trademark is: “instrumentation comprising computer assisted optical imagers and image analyzers for use in the detection of dental cavities, cutaneous melanoma, and other pathologies of the teeth, skin and other tissues.” We also have registered the internet domain names: www.eo-sciences.com, www.eosciences.com, www.melafind.com, www.difoti.com, www.smartlightsensors.com, and www.skinsurf.com.

      The following table lists the fundamental US patents that cover the MelaFind® methodology, apparatus, and systems:

US Patents Relating to MelaFind®

      We also have developed trade secret calibration methods, classifier programs, and search engines; these programs have been developed over many years and incorporate decades of experience in optical computer vision. In addition, our proprietary MelaFind® database of over 5,000 lesions has been compiled over a number of years and would be difficult to replicate.

FDA Regulation

      Our product, MelaFind®, is regulated as a medical device and is subject to extensive regulation by the FDA and other regulatory authorities in the US. The FD&C Act and other federal and state statutes and regulations govern the research, design, development, preclinical and clinical testing, manufacturing, safety, approval or clearance, labeling, packaging, storage, record keeping, servicing, promotion, import and export, and distribution of medical devices.

      Unless an exemption applies, each medical device we wish to commercially distribute in the US will require either prior premarket notification, or 510(k) clearance, or PMA approval, from the FDA. The FDA classifies medical devices into one of three classes. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are subject to general controls such as labeling, premarket notification, and adherence to the FDA’s QSR. Class II devices are subject to special controls such as performance standards, postmarket surveillance, FDA guidelines, as well as general controls. Some Class I and Class II devices are exempted by regulation from the premarket notification, or 510(k), clearance requirement or the requirement of compliance with certain provisions of the QSR. Devices are placed in Class III, which requires approval of a PMA application, if insufficient information exists to determine that the application of general controls or special controls are sufficient to provide reasonable assurance of safety and effectiveness, or they are life-sustaining, life-supporting or implantable devices, or the FDA deems these devices to be “not substantially equivalent” either to a previously 510(k) cleared device or to a “preamendment” Class III device in commercial distribution before May 28, 1976, for which PMA applications have not been required. The FDA classifies MelaFind® as a Class III device, requiring PMA approval.

      A PMA application must be supported by valid scientific evidence, which typically requires extensive data, including technical, pre-clinical, clinical, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. A PMA application must include, among other things, a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. A PMA application also must be accompanied by a user fee, unless exempt. For example, the FDA does not require the submission of a user fee for a small business’s first PMA. After a PMA application is submitted and found to be sufficiently complete, the FDA begins an in-depth review of the submitted information. During this review period, the FDA may request additional information, or clarification of information already provided. Also during the review

period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA generally will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures.

      We commenced the PMA application process for MelaFind® by filing a proposed Shell for a three module PMA on September 30, 2002. We filed as a Small Business Entity exempt from the user fee requirement. The Shell was accepted and two Modules have been filed and reviewed. The third Module will include the results of the pivotal clinical study, and cannot be filed until after that study is complete and its results have been evaluated. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:

      If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter, or approvable letter, which usually contains a number of conditions which must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device for certain indications. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed while the trials are conducted and the data acquired is submitted in an amendment to the PMA. Even with additional trials, the FDA may not approve the PMA application. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.

      New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling and device specifications, materials or design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application, and may not require as extensive clinical data or the convening of an advisory panel.

      Clinical trials are almost always required to support a PMA application, and are sometimes required for a 510(k) clearance. These trials generally require submission of an application for an IDE to the FDA. We have not been required to file an IDE for the MelaFind® clinical studies because FDA has considered the trials “non-significant risk” (NSR) studies subject to abbreviated IDE regulations, which do not require formal IDE submission. An IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent form are approved by appropriate institutional review boards at the clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward, but does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and effectiveness, even if the trial meets its intended success criteria. All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. As stated above, the clinical studies of MelaFind® are considered by the FDA as NSR. Consequently, the trials are conducted under the auspices of an abbreviated IDE. Clinical

trials must further comply with the FDA’s regulations for IRB approval and for informed consent. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and effectiveness success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. The commencement or completion of any of our clinical trials may be delayed or halted, or be inadequate to support approval of a PMA application, or 510(k) clearance, for numerous reasons, including, but not limited to, the following: